The interest rate spread as a forecasting tool of greek industrial production

Several studies have established the predictive power of the yield curve, i.e.: the difference between long and short term bond rates, in terms of real economic activity, for the U.S. and various European countries. In this paper we use monthly data of the industrial production index of the Greek economy ranging from January 2000 to December 2008 and we calculate the year-to-year percentage change, while the European Central Bank’s euro area government benchmark bonds of various maturities are employed for the calculation of the yield spreads. We also augment the models tested with non monetary policy variables: the Greek unemployment rate and the FTSE-100 stock index returns. The methodology employed in the effort to forecast negative year-to-year changes in the industrial production index 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 industrial production in Greece.