The yield curve and the prediction on the business cycle: a VAR analysis for the European Union

Giuseppe Cinquegrana and Domenico Sarno

MPRA Paper from University Library of Munich, Germany

Abstract: The literature on the yield curve deals with the capacity to predict the future inflation and the future real growth from the term structure of the interest rates. The aim of the paper is to verify this predictive power of the yield curve for the European Union at 16 countries in the 1995-2008 years. With this regard we propose two VAR models. The former is derived from the standard approach, the later is an extended version considering explicitly the macroeconomic effects of the risk premium. We propose the estimates of the models and their out-of-sample forecasts through both the European Union GDP (Gross Domestic Product) quarterly series and the European Union IPI (Industrial Production Index) monthly series. We show that the our extended model performs better than the standard model and that the out-of-sample forecasts of the IPI monthly series are better than ones of the GDP quarterly series. Moreover the out-of-sample exercises seems us very useful because they show the crowding out arising from Lehman Brother’s unexpected crash and the becoming next fine tuning process.

Keywords: yield curve; monetary policy; business cycle; risk premium; real growth (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 E52 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:21795

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