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

James D. Hamilton, Dong Heon Kim

Research output: Contribution to journalArticle

126 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
Publication statusPublished - 2002
Externally publishedYes

Fingerprint

Economic activity
Yield spread
Predictability
GDP growth
Real GDP
Usefulness
Term structure of interest rates
Factors
Short rate
Interest rate volatility
Term premium

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

A reexamination of the predictability of economic activity using the yield spread. / Hamilton, James D.; Kim, Dong Heon.

In: Journal of Money, Credit and Banking, Vol. 34, No. 2, 2002, p. 340-360.

Research output: Contribution to journalArticle

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