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.

Economic Sentiment and Yield Spreads in Europe

“…A similar finding for Europe is reported by Moneta (2003). Finally, Estrella et al . (2003) show that the positive relationship between spreads and future real activity is stable across a number of alternative time periods.…”

Improving Forecast Accuracy by Combining Recursive and Rolling Forecasts*

“…In practice, to be sure, some research suggests the importance of multiple or stochastic breaks (e.g., Pesaran and Timmermann, 2002; Rapach and Wohar, 2006). However, there are enough studies finding just a single break (e.g., Hooker, 2002; Estrella et al, 2003) to suggest practical value for our theoretical results. The local approximation, used in much of the literature on structural break tests, makes the analytics more tractable (as noted above, the local asymptotics allow us to derive closed form solutions under assumptions somewhat more general than in related prior work) and is consistent with the common view that, in practice, breaks are small enough that conventional tests have low power (see, e.g., the power discussion in Cogley and Sargent, 2005).…”

The Yield Curve and Financial Risk Premia

“…Although the predictive content has been well documented for more than two decades, recent evidence comes to the conclusion that it has somewhat weakened (Estrella et al 2003). In this respect, monetary policy plays an important role by altering the dynamics of inflation and output through its respective reaction coefficients to macroeconomic events.…”