What Does the Yield Curve Tell Us About GDP Growth?

59 Pages Posted: 2 Sep 2004 Last revised: 31 Aug 2022

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Monika Piazzesi

Stanford University; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Min Wei

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 2004

Abstract

A lot, including a few things you may not expect. Previous studies find that the term spread forecasts GDP but these regressions are unconstrained and do not model regressor endogeneity. We build a dynamic model for GDP growth and yields that completely characterizes expectations of GDP. The model does not permit arbitrage. Contrary to previous findings, we predict that the short rate has more predictive power than any term spread. We confirm this finding by forecasting GDP out-of-sample. The model also recommends the use of lagged GDP and the longest maturity yield to measure slope. Greater efficiency enables the yield-curve model to produce superior out-of-sample GDP forecasts than unconstrained OLS regressions at all horizons.

Suggested Citation

Ang, Andrew and Piazzesi, Monika and Wei, Min, What Does the Yield Curve Tell Us About GDP Growth? (August 2004). NBER Working Paper No. w10672, Available at SSRN: https://ssrn.com/abstract=579208

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Monika Piazzesi

Stanford University ( email )

Stanford, CA 94305
United States

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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773-834-3199 (Phone)
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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Min Wei

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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