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The Predictive Power of the Term Spread on Inequality in the United Kingdom: An Empirical Analysis

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey)

  • Edmond Berisha

    (Feliciano School of Business, Montclair State University, Montclair, NJ 07043)

  • Oguzhan Cepni

    (Central Bank of the Republic of Turkey, Anafartalar Mah. Istiklal Cad. No:10 06050 Ankara, Turkey)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

Abstract

A common tool in forecasting literature used in predicting future economic conditions is the term spread, which tends to contract near peaks and rise near troughs. Building on this known relationship, this paper explores the predictive power of the yield spread on the distribution of income in the United Kingdom (UK). The results reveal that income inequality responds negatively to increases in the yield spread over the medium-term. Specifically, we show that the term spread can help to predict UK’s income inequality growth both in- and out-of-sample. Our empirical findings show that it is the expected component of the term spread that has predictive power for lower income inequality in the UK.

Suggested Citation

  • Mehmet Balcilar & Edmond Berisha & Oguzhan Cepni & Rangan Gupta, 2019. "The Predictive Power of the Term Spread on Inequality in the United Kingdom: An Empirical Analysis," Working Papers 201981, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201981
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    as
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    More about this item

    Keywords

    Yield Spread; Inequality; Term Premium; Predictions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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