Testing for short and long-run causality: The case of the yield spread and economic growth

Jörg Breitung (breitung@statistik.uni-koeln.de) and Bertrand Candelon

No 2001,96, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: To assess the predictive content of the interest rate term spread for future economic growth, we distinguish short-run from long-run predictability by using two different approaches. First, following Dufour and Renault (1998) a test procedure is proposed to test for causality at different forecast horizons. Second, the framework of Geweke (1982) and Hosaya (1991) is used to construct a simple test for causality in the frequency domain. This methodology is applied to investigate the predictive content of the yield spread for future output growth. For U.S. data we observe good leading indicator properties at frequencies around one year and typical business cycle frequencies. Using German data we found a (rather weak) predictability at low frequencies only.

Keywords: Causality; Time series; Frequency domain; Prediction (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:200196

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