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The predictive power of the term spread on inequality in the United Kingdom: An empirical analysis

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  • Mehmet Balcilar
  • Edmond Berisha
  • Oğuzhan Çepni
  • Rangan Gupta

Abstract

A common tool in forecasting literature used in predicting future economic conditions is the term spread, which tends to contract near peaks and rise near troughs. Building on this known relationship, this paper explores the predictive power of the yield spread on the distribution of income in the United Kingdom (UK). The results reveal that income inequality responds negatively to increases in the yield spread over the medium‐term. Specifically, we show that the term spread can help to predict UK's income inequality growth both in‐ and out‐of‐sample. Our empirical findings show that it is the expected component of the term spread that has predictive power for lower income inequality in the UK.

Suggested Citation

  • Mehmet Balcilar & Edmond Berisha & Oğuzhan Çepni & Rangan Gupta, 2022. "The predictive power of the term spread on inequality in the United Kingdom: An empirical analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1979-1988, April.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:2:p:1979-1988
    DOI: 10.1002/ijfe.2254
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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