How Stable Is the Predictive Power of the Yield Curve? Evidence from Germany and the United States

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractEmpirical research over the last decade has uncovered predictive relationships between the slope of the yield curve and subsequent real activity and inflation. Some of these relationships are highly significant, but their theoretical motivations suggest that they may not be stable over time. We use recent econometric techniques for break testing to examine whether the empirical relationships are in fact stable. We consider continuous models, which predict either economic growth or inflation, and binary models, which predict either recessions or inflationary pressure. In each case, we draw on evidence from Germany and the United States. Models that predict real activity are more stable than those that predict inflation and binary models are more stable than continuous models. The model that predicts recessions is stable over our full sample period in both Germany and the United States.

Changes in predictive ability with mixed frequency data

“…The regime of lower predictive ability has a higher frequency after 1980, so this is in agreement with the literature that finds instability in the predictive ability of the spread with data up to 1998 (Estrella et al, 2003). However, periods of low predictive ability can be identified as the high-growth recovery periods that occur after recessions.…”

“…Estrella, Rodrigues and Schich (2003) report evidence of instability in the ability of the spread in predicting output growth, but no instability when the spread is used for predicting recessions. The measurement of predictive ability when there is a break is the object of study of Clark and McCracken (2005b).…”

New Evidence on the Information and Predictive Content of the Baltic Dry Index

“…Rockinger [7]; Boldrin et al [8]; Estrella et al [9]; Vassalou [10]; Duarte et al [11]; Hong et al [12]; Clements and Galvao [13]; Cooper and Priestley [14]; Marcellino and Schumacher [15], amongst others). Theoretically, changes in industrial production lead to changes in activity, employment and liquidity in the economy.…”

Forecast combination for U.S. recessions with real-time data

“…Estrella and Mishkin (1998), Chauvet and Potter (2005) and Estrella et al (2003) conclude that models focussing on the dichotomous index of the state of the U.S. economy are more accurate and stable than those concerned with continuous measures of economic activity. Predominantly, the probit model is used: see Estrella and Mishkin (1998), Chauvet andPotter (2002, 2005), Estrella et al (2003), Kauppi and Saikkonen (2008) and Kauppi (2010).…”