Research Papers in Economics, Department of Economics, Stockholm University
Does the Yield Spread Predict the Output Gap in the U.S.?
Abstract: Yes, but only at short horizons from 1 to 3 quarters over
the full post-World War II sample. The predictive relation between the
yield spread and the output gap is characterized by parameter instability.
Differently from the predictive models of the yield spread for output
growth, structural instability is not due to a loss of predictive ability
after 1985. Rather, the predictive relation estimated on post-1985 data
holds for a range of horizons larger than for pre-1985 data. I also show
that the information on current monetary policy is statistically irrelevant
for the prediction of the output gap over the post-1985 subsample.
Keywords: output gap; yield spread; predictability; (follow links to similar papers)
JEL-Codes: E27; E43; (follow links to similar papers)
17 pages, May 8, 2006
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