The Yield Curve and Real Activity

March 1, 1993

Preview Citation

Format: Chicago

Zuliu Hu. The Yield Curve and Real Activity, (USA: International Monetary Fund, 1993) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The financial press frequently suggest that the shape of yield curve reflects information about the prospects of the economy. This paper attempts to formalize the link between the yield curve and the real economic activity. A closed-form formula for the term structure of interest rates is derived. It is shown that the term structure embodies the market’s expectation about changes in the macroeconomic fundamental--the growth in real aggregate output of the economy. The paper then documents the use of bond market data for predicting GDP growth in the G-7 industrial countries. The results suggest that a simple measure of the slope of the yield curve, namely the yield spread, serves as a good predictor of future economic growth. The out-of-sample forecasting performance of the yield spread compares favorably with that of the alternative stock price-based model and a univariate time series (ARMA) model. One practical implication is that it may be useful to add some measure of the term structure to the list of

Subject: Asset prices, Consumer price indexes, Financial services, Prices, Production, Production growth, Short term interest rates, Yield curve

Keywords: Asset prices, Consumer price indexes, Covariance term, Government bond, Production growth, Real GDP, Short term interest rates, Structure model, Structure of interest rates, Structure variable, Term structure, Time series, WP, Yield curve, Zero-coupon bond

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/019
Stock No:

WPIEA0191993
ISBN:

9781451843705
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 40, No. 4, December 1993.

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