A decomposition of the predictive content of the term structure for output growth in Canada

The purpose of this study is to identify the underlying economic disturbances that drive the predictive content of the term structure for future output growth and those that may distort its information content. The study uses a structural vector autoregressive (VAR) model of a small and open economy for Canada that takes into account its relationship with financial markets in the USA and that Canada is a relatively large exporter of commodities. The model is used to decompose the sources of the variation of the slope of the yield curve and the correlation between the term spread and output growth. Monetary policy disturbances in both Canada and the USA, as well as short-term interest rates, are found to trigger excessive volatility in short-term rates and the term spread that do not contribute to the predictive content of the term spread for future output growth at horizons relevant for monetary policy analysis. However, innovations in output growth, inflation and other macroeconomic variables do not distort the forecast power of the term spread. Unlike the evidence for the USA, disturbances in nominal long-term yields are found to contribute about the same amount to the predictive content of the term spread as unexpected movements in monetary policy.     

A tale of two states: asymmetries in the UK small,value and momentum premiums

This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs.     

The Australian Term Structure as a Predictor of Real Economic Activity

This study examines the empirical relation between the yield spread of the term structure of interest rates and future economic activity in Australia. Results indicate that the term spread has significant power to predict real GDP growth but not nominal GDP growth. The term spread has more power in forecasting cumulative future growth than marginal growth in periods ahead. Around one-third of the variance of two year GDP growth can be explained by the term structure one to two quarters ahead. Explanatory power begins to decline beyond two to three years into the future whatever the combination of the long and short term yields used to measure the spread. The term spread has more explanatory power than the most widely used leading index for forecasting economic activity when forecasting cumulative GDP growth beyond two quarters.     

Forecasting recessions using financial variables: the French case

In this article, we focus on the ability of two financial variables—the yield curve spread and the euro–US dollar exchange rate—to predict French recessions over the period 1979–2010. First, we propose a turning point chronology for the French business cycle based on a classical conception of economic cycles and a non-parametric dating algorithm applied to the real GDP series. Second, static and dynamic probit models are developed and estimated to produce the recession probabilities. In-sample results show that the dynamic specification performs better than the static one and, above all, that the exchange rate has a stronger predictive power than the yield curve. Out-of-sample results finally confirm the predominant role assigned to the exchange rate in predicting the latest recession occurred in 2008.     

Empirical Evidence on the Austrian Business Cycle Theory

The Austrian business cycle theory suggests that a monetary shock disturbs relative prices, such as the term structure of interest rates, systematically altering profit rates across economic sectors. Resource use responds to those changes, generating a cyclical pattern of real income. The divergence of the interest rate structure, from the previous and unchanged time preferences, means that the expansion is unsustainable and must end in recession. Quarterly data for eight U.S. business cycles, 1950:1 through 1991:1 are standardized by time period and used to explore business cycle facts and relations between money, interest rates, capacity utilization and income. Results are consistent with the hypotheses of the Austrian theory of a business cycle caused by a monetary shock and propagated by relative price changes.     

中国城市化与经济增长的动态计量分析

为探讨我国城市化与经济增长之间的相互作用和相互影响,文章依据1978~2004年的时序数据,利用协整检验、格兰杰因果检验、误差修正模型、脉冲响应及方差分解等方法,对城市化水平与经济增长的关系进行动态计量分析。结果发现,经济增长是城市化水平提高的格兰杰原因,经济增长对城市化产生较大的正向冲击效应,而城市化对经济增长的作用强度不大;城市化水平受人均GDP影响的效应逐步增强,受自身影响的效应不断减弱,而人均GDP受自身波动影响的效应不断上升,受城市化水平影响的强度逐步下降。对我国城市化与经济增长关系的深入认识,有利于各级政府在推动城市化和促进经济增长的过程中采取合理对策,避免走入误区。     

A discrete time model of convergence for the term structure of interest rates in the case of entering a monetary union

This paper presents a method for constructing the term structure of interest rate spreads for two currencies in the context of a country’s entry into a monetary union. We propose a special type of process that ensures the convergence of the short-term interest rate spread to zero by a fixed moment in time, which we call the discrete-time Brownian bridge process. Using this process and the conventional pricing kernel framework, we derive double recursive formulas for computing the affine coefficients for the term structure of interest rate spread. The estimated model counterpart, which is based on the pre-EMU interest rate spread data for the interest rates of the German mark and Italian lira, fits the data reasonably well and captures the stylized empirical facts. Namely, spreads for all maturities have downward trends, and the longer the maturity is, the less spread there is.     

Social Exclusion and Economic Growth: An Empirical Investigation in European Economies

The aims of this article are to propose an overall index of social exclusion and to analyze its relationship with economic growth in European countries. We approach social exclusion as a multidimensional phenomenon by a three‐mode principal components analysis (Tucker3 model). This method is applied to estimate an indicator of social exclusion for 28 European countries between 1995 and 2010. The empirical evidence shows that in the short run: (1) Granger causality runs one way from social exclusion to economic growth and not the other way; (2) countries with a higher level of social exclusion have higher growth rates of real GDP per capita; and (3) social exclusion has a larger effect than income inequality on economic growth. The policy implication of our analysis is that social inclusion is not a source of economic growth in the short term.     

Testing the predictive power of the term structure without data snooping bias

It is well documented that the term structure of interest rates has predictive power for real economic growth. Applying the stepwise superior predictive ability test, we find that superior models contain both a short-term rate and a term spread.     

Applications of an IS-MP Model with Yield Curve

This paper presents an IS-MP model with the term structure of interest rates (i.e., the yield curve) and discusses some of its applications to recent macroeconomic activities and policy issues. Specifically, the model is employed to explain (1) why a steepening yield curve may signal the subsequent economic expansion, (2) why long-term zero interest rate policy (ZIRP) may not completely avoid recessions, but disables the yield curve from being inverted to signal the following economic recession, (3) how Operation Twist (OT) may help ease the recession, in particular, under ZIRP, and what limit it may face.     

The conditional influence of term spread and pattern changes on future equity returns

We extend previous research examining the relation between interest rates and equity returns using a multivariate analysis of covariance model with a dynamic yield curve and conditioned term spread. We find yield pattern changes predict economic equity returns; that the long end-of-yield curve is a strong determinant factor; and, in contrast to previous research, we find no relation between a decrease in the short rate and equity returns. However, the conditional term spread captures a significant positive return indicating that the degree of decline in the short rate relative to the long rate is of more importance than the term spread alone.     

The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure

The paper analyzes the influence of the Bundesbank's inflation targeting policy on the behavior of the spread between long‐term and short‐term German interest rates. The term spread is considered to be a key indicator of future inflation and economic activity. The application of a momentum threshold autoregressive cointegration model enables the authors to study the adjustment process of the spread toward equilibrium in greater detail than heretofore possible, and permits relaxation of the linear and symmetric adjustment assumption underlying conventional cointegration and error correction investigations on the expectations hypothesis. The empirical findings are consistent with the hypothesized asymmetric adjustment behavior of the spread and can be explained by the Bundesbank's inflation targeting policy during the period from 1975 to 1998.     

当前我国经济运行的周期性波动特征

目前我国经济运行正处于存货投资短周期波动的扩张期、固定资产投资增长短周期和中周期波动的扩张期、产业结构升级中周期波动的衰退期和中长周期波动的复苏期。与这一系列经济活动的周期性变化特征相对应 ,我国GDP增长正处于短周期波动的扩张期、中周期波动的复苏期和中长周期波动的谷底。我国经济已进入了新一轮的快速增长期 ,而且短期内不会出现大幅度波动现象 ,政府仍应采取中性宏观经济政策。     

On testing for symmetry in business cycles

Business cycle forecasting has become an important part of short and medium term economic planning. Such forecasting, however, is often very intricate, as business cycles are not at all periodic, just recurrent. Furthermore, they often include irregular timing and varying amplitudes. When patterns and relationships are very irregular there are no simple reliable business cycle forecasting procedures. In practice there is, somewhere, a limit for business cycle predictability, and it is often worthwhile to examine empirically the various theoretical regularity assumptions. One important regularity issue concerns the business cycle symmetry assumption. The present paper empirically tests the hypothesis of symmetry around business cycle turning points in some economic time series. Two test procedures are applied. One is based on the analysis of transition probabilities between expansion and recession regimes. The second procedure tests symmetry versus asymmetry through skewness statistics. The analysis is based on detrending through the use of linear deterministic trends as well as by Beveridge-Nelson decompositions.     

Nonstationarity,cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.     

Forecasting recessions: the importance of the financial cycle

Financial cycles can be important drivers of real activity, but there is scant evidence about how well they signal recession risks. We address this question, using a range of financial cycle measures. Unlike most papers, ours assesses forecasting performance not just for the United States but also for a panel of advanced and emerging market economies. We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread - the most widely used indicator in the literature - in nearly all specifications. These results are robust to different recession specifications.     

The Interaction of Financial Fragility and the Business Cycle in Determining Banks’ Loan Losses: An Investigation of the Italian Case

The Basel II capital accord and the recent crises have fostered the debate over the financial stability of the aggregate banking sector. Because loan losses are an important factor for banking stability, this paper aims to gauge the impact of real and financial fragility on default losses of Italian banks. To this end the ratio of non‐performing loans to total loans is regressed on the business cycle and indebtedness. In addition, to capture the joint effect of real and financial fragility, the analysis considers an interaction term, which to our knowledge has never been applied before to Italian default data. Based on the interaction model, results show that the actual impact of financial fragility on default losses depends not only on the business cycle phase but also on the firm's size, whereby in adverse economic conditions, small firms are more significantly affected by financial fragility.     

The Influence of IMF Programs on the Re-election of Debtor Governments

The paper develops a model explaining why IMF programs are less likely to be concluded before national election dates. Since conclusion of an IMF arrangement may signal the incumbent's incompetence, rational voters use this signal when deciding upon his re-election. In order to demonstrate competence, politicians may therefore decide not to conclude IMF programs prior to elections. The model also shows that re-election probabilities of politicians who nevertheless conclude arrangements at election times depend on the state of the economy. Using panel data for 96 countries between 1976 and 1997, the model is tested empirically. The results show that conclusion of an IMF arrangement within six months prior to an election increases re-election probabilities when GDP growth is low, but reduces the chance to win an election with high growth rates.     

Forecasting US recessions with various risk factors and dynamic probit models

This paper extends probit recession forecasting models by incorporating various recession risk factors and using the advanced dynamic probit modeling approaches. The proposed risk factors include financial market expectations of a gloomy economic outlook, credit or liquidity risks in the general economy, the risks of negative wealth effects resulting from the bursting of asset price bubbles, and signs of deteriorating macroeconomic fundamentals. The model specifications include three different dynamic probit models and the standard static model. The out-of-sample analysis suggests that the four probit models with the proposed risk factors can generate more accurate forecasts for the duration of recessions than the conventional static models with only yield spread and equity price index as the predictors. Among the four probit models, the dynamic and dynamic autoregressive probit models outperform the static and autoregressive models in terms of predicting the recession duration. With respect to forecasting the business cycle turning points, the static probit model is as good as the dynamic probit models by being able to flag an early warning signal of a recession.     

Government size,decentralization and growth: empirical evidence from Italian regions

The aim of this study is to empirically assess the relationship among government size, decentralization and economic growth in Italian ordinary regions. The empirical analysis, based on a panel dataset on Italian regions, provides evidence in support of the existence of an inverted U-shaped relationship between public expenditure and economic growth, that depends on the degree of fiscal decentralization. In particular, according to our estimates on the specific Italian case, the optimal degree of decentralization is around 32%, while the optimal government size value is approximately 52%.