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The yield curve as a leading indicator in economic forecasting in the U.K

Author

Listed:
  • Dalu Zhang

    (University of East Anglia)

  • Peter Moffatt

    (University of East Anglia)

Abstract

This paper investigates a model utilising the term structure of interest rates to predict output growth and recession in the UK. In contrast to previous literature, information retrieved from the whole yield curve is used rather than just the yield spread. Using di↵erent methods, our models are found to outperform the yield spread models both in in-sample and out-of-sample forecasting. Notably, the B-spline fitting model is able to forecast the 2009-2010 recession. Moreover, Model B show great forecasting ability in out-of-sample output growth forecasting. In most cases, models based on B-spline perform better than the ones based on Diebold-Li framework.

Suggested Citation

  • Dalu Zhang & Peter Moffatt, 2012. "The yield curve as a leading indicator in economic forecasting in the U.K," University of East Anglia Applied and Financial Economics Working Paper Series 035, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:aepppr:2012_35
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    References listed on IDEAS

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