A reappraisal of the leading indicator properties of the yield curve under structural instability

This paper provides an extensive re-examination of the leading indicator properties of the yield curve in four major developed countries (Canada, Germany, the United Kingdom, and the United States). We study whether the yield spread still qualifies as a useful predictor of real activity in the presence of structural change. Based on tests for multiple structural breaks, we find strong evidence of instability in the relationship between the yield spread and output growth, which allows us to pin down the exact dates associated with these breaks for the different countries. We find that the window selection methods recently developed for forecasting in the presence of structural change generally offer some improvements in terms of forecast accuracy. However, our overall results strongly suggest that the yield curve has been losing its edge as a predictor of output growth in recent years.