A Re-Examination of the Predictability of Economic Activity Using the Yield Spread

UCSD Economics Discussion Paper 2000-23

38 Pages Posted: 4 Jan 2001

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Dong Heon Kim

School of Economic Studies

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

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.

Keywords: Term Structure, Business Cycles, Yield Spread

JEL Classification: E32, E37, E43

Suggested Citation

Hamilton, James D. and Kim, Dong Heon, A Re-Examination of the Predictability of Economic Activity Using the Yield Spread (September 2000). UCSD Economics Discussion Paper 2000-23, Available at SSRN: https://ssrn.com/abstract=245584 or http://dx.doi.org/10.2139/ssrn.245584

James D. Hamilton (Contact Author)

University of California at San Diego ( email )

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Dong Heon Kim

School of Economic Studies ( email )

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