Working Paper: NBER ID: w10672
Authors: Andrew Ang; Monika Piazzesi; Min Wei
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 regressions at all horizons.
Keywords: Yield Curve; GDP Growth; Forecasting; Monetary Policy
JEL Codes: E4; E5; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short rate (E43) | GDP growth (O49) |
| yield curve (E43) | GDP growth (O49) |
| term spreads (G10) | GDP growth (O49) |
| yield curve dynamics (E43) | GDP growth predictions (F17) |