Abstract
This paper examines the stability of the predictive power of the yield spread for future GDP growth. We find that the ability of the spread to predict future GDP growth has weakened since 1984:Q1. Given the decomposition of the yield spread into the expectation component and the term premium component, we investigate the change in the predictability of both components and find that the term premium component appears to have lost the predictive power significantly while the predictive power of the expectation component has remained. We conjecture that since the 1984:Q1, the cyclical movement of the term premium seems to have been reduced due to the significant reduction in the volatility of US macroeconomy.
| Original language | English |
|---|---|
| Pages (from-to) | 449-463 |
| Number of pages | 15 |
| Journal | Seoul Journal of Economics |
| Volume | 31 |
| Issue number | 4 |
| Publication status | Published - 2018 |
Bibliographical note
Funding Information:This paper is in part based on Euihwan Park’s Ph.D. Dissertation (2018) at the Korea University. The authors would like to thank the seminar participants at Korea University for their helpful comments and suggestions. Dong Heon Kim acknowledges the Korea University Research Grant.
Publisher Copyright:
© 2018, Seoul National University,Institute of Economic Research.
Keywords
- Break
- Expectations effect
- Great Moderation
- Predictability
- Term premium effect
- Yield spread
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)