EconPapers    
Economics at your fingertips  
 

The Predictive Power of the Yield Spread: Further Evidence and a Structural Interpretation

Carlo Favero (), Iryna Kaminska and Ulf Söderström ()

No 280, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper brings together two strands of the empirical macro literature:the reduced-form evidence that the yield spread helps in forecasting output and the structural evidence on the difficulties of estimating the effect of monetary policy on output in an intertemporal Euler equation. We show that including a short-term interest rate and inflation in the forecasting equation improves the forecasting performance of the spread for future output but the coefficients on the short rate and inflation are difficult to interpret using a standard macroeconomic framework. A decomposition of the yield spread into an expectations-related component and a term premium allows a better understanding of the forecasting model. In fact, the best forecasting model for output is obtained by considering the term premium, the short-term interest rate and inflation as predictors. We provide a possible structural interpretation of these results by allowing for time-varying risk aversion, linearly related to our estimate of the term premium, in an intertemporal Euler equation for output.

Date: 2005
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2005/280.pdf (application/pdf)

Related works:
Working Paper: The Predictive Power of the Yield Spread: Further Evidence and A Structural Interpretation (2005) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:280

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().

 
Page updated 2025-03-30
Handle: RePEc:igi:igierp:280