How Stable is the Forecasting Performance of the Yield Curve for Output Growth?

Abstract

We provide an extensive evaluation of the predictive performance of the US yield curve for US gross domestic product growth by using new tests for forecast breakdown, in addition to a variety of in-sample and out-of-sample evaluation procedures. Empirical research over the past decades has uncovered a strong predictive relationship between the yield curve and output growth, whose stability has recently been questioned. We document the existence of a forecast breakdown during the BurnsMiller and Volker monetary policy regimes, whereas during the early part of the Greenspan era the yield curve emerged as a more reliable model to predict future economic activity.