Journal Article

Does the yield spread predict real economic activity? : a multicountry analysis


Abstract: This article evaluates the ability of the yield spread to forecast real economic activity in 11 industrial countries. The first section of this article defines the yield spread and explains why the spread may be a useful predictor of real economic activity. The second section describes the data and criteria used to evaluate the predictive power of the yield spread. The third section examines whether yield spreads have reliably forecast real economic activity in the 11 countries, using several measures of real economic activity and alternative forecast horizons. The empirical results indicate the yield spread is a statistically and economically significant predictor of real economic activity in several industrial countries besides the United States. In addition, the yield spread forecasting model generally outperforms two alternative forecasting models in predicting future real GDP growth.

Keywords: Forecasting; Interest rates; Economic conditions - United States; Gross domestic product;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Economic Review

Publication Date: 1997

Volume: 82

Issue: Q III

Pages: 37-53