Investigating Time-Variation in the Marginal Predictive Power of the Yield Spread

54 Pages Posted: 22 Aug 2007

See all articles by Luca Benati

Luca Benati

European Central Bank (ECB)

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: August 2007

Abstract

We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth, the monetary policy-based one, and Harvey's (1988) 'real yield curve' one. Instead, we offer a new conjecture.

Keywords: Bayesian VARs, stochastic volatility, time-varying parameters, median-unbiased estimation, Monte Carlo integration

JEL Classification: E42, E43, E47

Suggested Citation

Benati, Luca and Goodhart, Charles A.E., Investigating Time-Variation in the Marginal Predictive Power of the Yield Spread (August 2007). ECB Working Paper No. 802. Available at SSRN: https://ssrn.com/abstract=1005123

Luca Benati (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Charles A.E. Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

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