He, Zhongfang (2009): Forecasting output growth by the yield curve: the role of structural breaks.

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Abstract
This paper proposes a new structuralbreak vector autoregressive (VAR) model for predicting real output growth by the nominal yield curve information. We allow for the possibility of both insample and outofsample breaks in parameter values and use information in historical regimes to make inference on outofsample breaks. A Bayesian estimation and forecasting procedure is provided which accounts for the uncertainty of structural breaks and model parameters. We discuss dynamic consistency when forecasting recursively with structural break models, which has been ignored in the existing literature, and provide a solution. Applied to monthly US data from 1964 to 2006, we find strong evidence of structural breaks in the predictive relation between the yield curve and output growth in late 1979 and early 1983. The short rate has more predictive power for output growth than the term spread before 1979 while the term spread becomes more significant since the breakof 1983. Incorporating the possibility of structural breaks improves outofsample forecasts of output growth from 1 to 12 months ahead.
Item Type:  MPRA Paper 

Original Title:  Forecasting output growth by the yield curve: the role of structural breaks 
Language:  English 
Keywords:  Vector Autoregressive Model; Structural Break; Forecast; Output Growth; Yield Curve, Chib Model, MCMC, Bayesian 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C53  Forecasting and Prediction Methods ; Simulation Methods E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C11  Bayesian Analysis: General 
Item ID:  28208 
Depositing User:  Zhongfang He 
Date Deposited:  19. Jan 2011 12:36 
Last Modified:  24. Mar 2015 10:06 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/28208 