Conference Paper
What does the yield curve tell us about GDP growth?
Abstract: A lot, including a few things you may not expect. Previous studies find that the term spread forecasts GDP but these regressions are unconstrained and do not model regressor endogeneity. We build a dynamic model for GDP growth and yields that completely characterizes expectations of GDP. The model does not permit arbitrage. Contrary to previous findings, we predict that the short rate has more predictive power than any term spread. We confirm this finding by forecasting GDP out-of-sample. The model also recommends the use of lagged GDP and the longest maturity yield to measure slope. Greater efficiency enables the yield-curve model to produce superior out-of-sample GDP forecasts than unconstrained OLS at all horizons.
Status: Published in Finance and macroeconomics : a conference (2003: February 28-March 1)
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File(s): File format is application/pdf http://www.frbsf.org/economics/conferences/0303/gdp.pdf
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Bibliographic Information
Provider: Federal Reserve Bank of San Francisco
Part of Series: Proceedings
Publication Date: 2003
Issue: Mar