Abstract: This paper attempts to formalize the link between the yield curve and real economic activity. A closed-form formula for the term structure of interest rates is derived. The paper then documents the use of bond market data for predicting GDP growth in the G-7 industrial countries. The results suggest that a simple measure of the slope of the yield curve, namely the yield spread, serves as a good predictor of future economic growth. The out-of-sample forecasting performance of the yield spread compares favorably with that of the alternative stock price--based model and a univariate time series (ARMA) model.
Publication Year: 1993
Publication Date: 1993-03-01
Language: en
Type: article
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Cited By Count: 20
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