PREDICTING REAL GROWTH AND THE PROBABILITY OF RECESSION IN THE EURO AREA USING THE YIELD SPREAD

Ivan Paya (), Agustín Duarte and Ioannis Venetis ()
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Agustín Duarte: Universidad de Alicante

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: Although the spread has been established as a leading indicator of economic activity, recent studies on US and EU countries have documented, theoretically and empirically, that the term spread-output growth relationship may not be stable over time and it may be subjected to nonlinearities. Using aggregate data for the Euro area over the period 1970:1 - 2000:4, we applied linear regression as well as nonlinear models to examine the predictive accuracy of the term spread-output growth relationship. Our results confirm the ability of the yield curve as a leading indicator. Moreover, significant nonlinearity with respect to time and past annual growth is detected outperforming the linear model in out-of-sample forecasts of one-year-ahead annual growth. Furthermore probit models that use the EMU and US yield spreads are successful in predicting EMU recessions.

Keywords: Term Spread and Real Growth; Threshold Models; Recession; Forecasting Accuracy (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-07
New Economics Papers: this item is included in nep-eec, nep-for and nep-mac
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Citations: View citations in EconPapers (8)

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2004-31.pdf Fisrt version / Primera version, 2004 (application/pdf)

Related works:
Journal Article: Predicting real growth and the probability of recession in the Euro area using the yield spread (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2004-31

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