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How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited

  • Junko Koeda

    (Faculty of Economics, University of Tokyo)

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    This note analyzes the yield-curve predictability for GDP growth by modifying the time-series property of the interest rate process in Ang, Piazzesi, and Wei (2006). When interest rates have a unit root and term spreads are stationary, the short rate's forecasting role changes, and the combined information from the short rate and term spread intuitively reveals the relationship between the shift of yield curves and GDP growth.

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    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-237.

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    Length: 19 pages
    Date of creation: Nov 2010
    Date of revision: Jan 2011
    Handle: RePEc:cfi:fseres:cf237
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    1. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
    2. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
    3. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
    4. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    5. Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
    6. Bordo, Michael D. & Haubrich, Joseph G., 2008. "Forecasting with the yield curve; level, slope, and output 1875-1997," Economics Letters, Elsevier, vol. 99(1), pages 48-50, April.
    7. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    8. Hibiki Ichiue, 2004. "Why Can the Yield Curve Predict Output Growth, Inflation, and Interest Rates? An Analysis with Affine Term Structure Model," Econometric Society 2004 Far Eastern Meetings 581, Econometric Society.
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