GROSS DOMESTIC PRODUCT GROWTH PREDICTIONS THROUGH THE YIELD SPREAD: TIME-VARIATION AND STRUCTURAL BREAKS

We use time-varying-parameter models and real-time data to describe the evolution of the leading properties of the yield spread for output growth in five European economies and in the USA over the last decades and until the third quarter of 2010. We evaluate the predictive performance of benchmark term-structure models and identify structural breaks in the marginal processes of term spreads and government bond yields to shed light on the dynamic characteristics of the yield curve. Econometric analysis shows that (i) the predictive content of the term spread is not always significant over time and across countries; (ii) the spread significantly contributes to the forecast performance of simple growth regressions in Europe but not in the USA in recent years; and (iii) the variance of the random shocks to the term spreads tends to fall in all countries. This decline is accompanied by vanishing leading properties from the mid-1990s. Such properties reappear after 2008. Copyright (C) 2012 John Wiley & Sons, Ltd.