Title

The yield spread's ability to forecast economic activity: What have we learned after 30 years of studies?

Document Type

Article

Source of Publication

Journal of Business Research

Publication Date

1-1-2020

Abstract

© 2018 Elsevier Inc. Forecasting economic activity has attracted a great deal of econometric work, while mixed evidence has been found concerning the ability of the yield spread to forecast gross domestic product (GDP). This paper uses a meta-analysis framework to deal with the heterogeneity in the results seen in the literature. Our findings suggest that nonlinearities, as well as the role of monetary policy, should be considered when modeling this relationship. We also find that the forecasting ability of the yield spread has become much stronger over the last twenty years. Moreover, we argue that the yield spread is a useful tool in predicting economic activity in many major world economies, particularly those of the US, Canada, and Europe and, more importantly, especially during financial stress periods. Last, we find that improvements in the stock market reduce the usefulness of the yield spread in predicting future economic activity.

ISSN

0148-2963

Publisher

Elsevier Inc.

Volume

106

First Page

221

Last Page

232

Disciplines

Business

Keywords

Business cycle forecasting, Leading indicators, Meta-analysis, Yield spread

Scopus ID

85053160012

Indexed in Scopus

yes

Open Access

no

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