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The Yield Curve and Real Activity

Author

Listed:
  • Zuliu Hu

    (International Monetary Fund)

Abstract

This paper attempts to formalize the link between the yield curve and real economic activity. A closed-form formula for the term structure of interest rates is derived. The paper then documents the use of bond market data for predicting GDP growth in the G-7 industrial countries. The results suggest that a simple measure of the slope of the yield curve, namely the yield spread, serves as a good predictor of future economic growth. The out-of-sample forecasting performance of the yield spread compares favorably with that of the alternative stock price--based model and a univariate time series (ARMA) model.

Suggested Citation

  • Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 781-806, December.
  • Handle: RePEc:pal:imfstp:v:40:y:1993:i:4:p:781-806
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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