Predicting output using the entire yield curve

Azamat Abdymomunov

Journal of Macroeconomics, 2013, vol. 37, issue C, 333-344

Abstract: Many papers find that the term spread of the term structure of government bond yields can predict future output growth. This paper extends that literature by exploiting information in the entire term structure of interest rates. I apply a dynamic version of the Nelson–Siegel yield curve model to jointly model real GDP growth and yield factors. I find that the dynamic yield curve model produces better out-of-sample forecasts of real GDP than those generated by the traditional term spread model. The main source of this improvement is in the dynamic approach to constructing forecasts versus the direct forecasting approach used in the term spread model. While I confirm the importance of the term spread as a predictor of future output, there is also a gain from using information in the curvature factor.

Keywords: Yield curve; Term spread; Nelson–Seigel model; Forecasting (search for similar items in EconPapers)
JEL-codes: C22 E43 E44 E47 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:37:y:2013:i:c:p:333-344

DOI: 10.1016/j.jmacro.2013.05.002

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