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A reappraisal of the leading indicator properties of the yield curve under structural instability

Schrimpf, Andreas and Wang, Qingwei 2010. A reappraisal of the leading indicator properties of the yield curve under structural instability. International Journal of Forecasting 26 (4) , pp. 836-857. 10.1016/j.ijforecast.2009.08.005

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Abstract

This paper provides an extensive re-examination of the leading indicator properties of the yield curve in four major developed countries (Canada, Germany, the United Kingdom, and the United States). We study whether the yield spread still qualifies as a useful predictor of real activity in the presence of structural change. Based on tests for multiple structural breaks, we find strong evidence of instability in the relationship between the yield spread and output growth, which allows us to pin down the exact dates associated with these breaks for the different countries. We find that the window selection methods recently developed for forecasting in the presence of structural change generally offer some improvements in terms of forecast accuracy. However, our overall results strongly suggest that the yield curve has been losing its edge as a predictor of output growth in recent years.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: Yield curve; Macroeconomic forecasting; Structural change; Forecast window selection; Forecast breakdowns
Publisher: Elsevier
ISSN: 0169-2070
Date of Acceptance: 2009
Last Modified: 04 Jun 2017 06:55
URI: http://orca.cf.ac.uk/id/eprint/66244

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