GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries

Periklis Gogas and Ioannis Pragidis ()

No 2-2010, DUTH Research Papers in Economics from Democritus University of Thrace, Department of Economics

Abstract: Several studies have established the predictive power of the yield curve in terms of real economic activity. In this paper we use data for a variety of E.U. countries: both EMU (Germany, France, Italy) and non-EMU members (Sweden and the U.K.). The data used range from 1991:Q1 to 2009:Q1. For each country, we extract the long run trend and the cyclical component of real economic activity, while the corresponding interbank interest rates of long and short term maturities are used for the calculation of the country specific yield spreads. We also augment the models tested with non monetary policy variables: the countries’ unemployment rates and stock indices. The methodology employed in the effort to forecast real output, is a probit model of the inverse cumulative distribution function of the standard distribution, using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the non-monetary variables has significant forecasting power in terms of real economic activity but the results differ qualitatively between the individual economies examined raising non-trivial policy implications.

Keywords: GDP; Probit; Forecasting; Yield Curve (search for similar items in EconPapers)
JEL-codes: C53 E43 E44 E52 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2010-05-08
New Economics Papers: this item is included in nep-cba, nep-eec and nep-for
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Working Paper: GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:duthrp:2010_002

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