The predictive power of the yield spread for future economic expansions: Evidence from a new approach
Bartosz Gebka () and
Mark Wohar ()
Economic Modelling, 2018, vol. 75, issue C, 181-195
We investigate the predictive power of the yield spread for future economic growth. The novel approach adopted here is to utilise its predictive ability for the whole distribution of future growth, rather than predicting the center of this distribution directly. Our results confirm previous findings that the yield spread does contain additional information about the future GDP growth, which varies over time. Most importantly, utilising the information contained in the whole conditional distribution of predicted GDP growth, rather than concentrating on the center of it, provides additional forecasting power for shorter (3–9 months) horizons. This approach is also superior in forecasting future expansionary phases, notably a more common phenomenon than recessions for which the traditional, OLS-based forecasts seem to perform better.
Keywords: Yield curve; Yield spread; Predictability; Forecasting; Economic growth (search for similar items in EconPapers)
JEL-codes: C21 G19 E43 E44 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:75:y:2018:i:c:p:181-195
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