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Predicting European Union Recessions in the Euro Era: The Yield Curve as a Forecasting Tool of Economic Activity

  • Dionisios Chionis
  • Periklis Gogas

    ()

  • Ioannis Pragidis

Several studies have established the predictive power of the yield curve for the U.S. and various European countries. In this paper we use data from the European Union (EU15), from 1994:Q1 to 2008:Q3. We use the European Central Bank’s euro area yield spreads to predict European real GDP deviations from the long-run trend. We also augment the models tested with non monetary policy variables: the unemployment and a composite European stock price index. The methodology employed is a probit model of the inverse cumulative distribution function of the standard distribution using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the composite stock index has significant forecasting power in terms of the EU15 real output. Copyright International Atlantic Economic Society 2010

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File URL: http://hdl.handle.net/10.1007/s11294-009-9247-2
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Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

Volume (Year): 16 (2010)
Issue (Month): 1 (February)
Pages: 1-10

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Handle: RePEc:kap:iaecre:v:16:y:2010:i:1:p:1-10
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  1. Jonathan H. Wright, 2006. "The yield curve and predicting recessions," Finance and Economics Discussion Series 2006-07, Board of Governors of the Federal Reserve System (U.S.).
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  7. Mateus A. Feitosa & Benjamin M. Tabak, 2007. "Predictability Of Economic Activity Using Yield Spreads: The Case Of Brazil," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 029, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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  9. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-60, May.
  10. Venetis, Ioannis A. & Paya, Ivan & Peel, David A., 2003. "Re-examination of the predictability of economic activity using the yield spread: a nonlinear approach," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 187-206.
  11. Marcelle Chauvet & Simon Potter, 2005. "Forecasting recessions using the yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 77-103.
  12. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
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