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

36 Pages Posted: 12 Oct 2000 Last revised: 26 Sep 2022

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: October 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.

Suggested Citation

Hamilton, James D. and Kim, Dong Heon, A Re-Examination of the Predictability of Economic Activity Using the Yield Spread (October 2000). NBER Working Paper No. w7954, Available at SSRN: https://ssrn.com/abstract=245727

James D. Hamilton (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
Mail code: 0508
La Jolla, CA 92093-0508
United States
619-534-5986 (Phone)
619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dong Heon Kim

School of Economic Studies ( email )

Oxford Road
University of Manchester
Manchester M13 9PL
United Kingdom