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

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  • Junko Koeda

    (Faculty of Economics, University of Tokyo)

Abstract

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.

Suggested Citation

  • Junko Koeda, 2011. "How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited," CIRJE F-Series CIRJE-F-784, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2011cf784
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    References listed on IDEAS

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    1. 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.
    2. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    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 254-259, April.
    4. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    5. 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.
    6. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    7. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
    8. 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.
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    Cited by:

    1. Roman Horvath, 2012. "Do Confidence Indicators Help Predict Economic Activity? The Case of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(5), pages 398-412, November.
    2. Jiyoung Lee, 2015. "Disentangling the Predictive Power of Term Spreads under Inflation Targeting," International Economic Journal, Taylor & Francis Journals, vol. 29(3), pages 419-450, September.
    3. Junko Koeda, 2011. "Japanese Yield Curves In and Out of a Zero Rate Environmnet: A Macro-Finance Perspective," CARF F-Series CARF-F-254, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Nov 2011.
    4. Huseyin Kaya, 2013. "On the Predictive Power of Yield Spread for Future Growth and Recession: The Turkish Case," Working Papers 010, Bahcesehir University, Betam, revised Mar 2013.

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