What Does the Yield Curve Tell Us About GDP Growth?

40 Pages Posted: 23 Jan 2005

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Monika Piazzesi

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

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: March 24, 2003

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 at all horizons.

Keywords: GDP Forecasting; Short Rate; Term Spread; Arbitrage-Free Term Structure Models; Out-of-Sample Forecast

Suggested Citation

Ang, Andrew and Piazzesi, Monika and Wei, Min, What Does the Yield Curve Tell Us About GDP Growth? (March 24, 2003). AFA 2005 Philadelphia Meetings; Columbia Business School Working Paper. Available at SSRN: https://ssrn.com/abstract=332200 or http://dx.doi.org/10.2139/ssrn.332200

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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

Monika Piazzesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-3199 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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