A reexamination of the predictability of economic activity using the yield spread

James D. Hamilton, Dong Heon Kim

Research output: Contribution to journalArticle

132 Citations (Scopus)

Abstract

This paper revisits the yield spread's usefulness for predicting future real GDP growth. We show that the contribution of the spread can be decomposed into the effect of expected future changes in short rates and the effect of the term premium. We find that both factors are relevant for predicting real GDP growth but the respective contributions differ. We investigate whether the cyclical behavior of interest rate volatility could account for either or both effects. We find that while volatility displays important correlations with both the term structure of interest rates and GDP, it does not appear to account for the yield spread's usefulness for predicting GDP growth.

Original languageEnglish
Pages (from-to)340-360
Number of pages21
JournalJournal of Money, Credit and Banking
Volume34
Issue number2
DOIs
Publication statusPublished - 2002

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'A reexamination of the predictability of economic activity using the yield spread'. Together they form a unique fingerprint.

  • Cite this