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Investigating time-variation in the marginal predictive power of the yield spread

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  • Benati, Luca
  • Goodhart, Charles

Abstract

We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth, the monetary policy-based one, and Harvey's (1988) 'real yield curve' one. Instead, we offer a new conjecture. JEL Classification: E42, E43, E47

Suggested Citation

  • Benati, Luca & Goodhart, Charles, 2007. "Investigating time-variation in the marginal predictive power of the yield spread," Working Paper Series 802, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007802
    Note: 802546
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    More about this item

    Keywords

    Bayesian VARs; medianunbiased; stochastic volatility; time-varying parameters;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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