The Yield Curve and Real Activity

Zuliu Hu
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Zuliu Hu: International Monetary Fund

IMF Staff Papers, 1993, vol. 40, issue 4, 781-806

Abstract: This paper attempts to formalize the link between the yield curve and real economic activity. A closed-form formula for the term structure of interest rates is derived. The paper then documents the use of bond market data for predicting GDP growth in the G-7 industrial countries. The results suggest that a simple measure of the slope of the yield curve, namely the yield spread, serves as a good predictor of future economic growth. The out-of-sample forecasting performance of the yield spread compares favorably with that of the alternative stock price--based model and a univariate time series (ARMA) model.

JEL-codes: E32 G12 (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:pal:imfstp:v:40:y:1993:i:4:p:781-806

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