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Term Structure Forecasts of Long-Term Consumption Growth

Published online by Cambridge University Press:  06 April 2009

Andrea Berardi  and
Walter Torous
Andrea Berardi
Affiliation:
[email protected], Università di Verona, SAFE Center, via Giardino Giusti 2, Verona 37129, Italy
Walter Torous
Affiliation:
[email protected], University of California, Anderson Graduate School of Management, 110 Westwood Plaza, Los Angeles, CA 90095.
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Abstract

Relying on a simple general equilibrium model of the term structure, we show that both nominal yields and real consumption growth rates can be affine in the unobservable state variables. We can then express real consumption growth rates in terms of nominal yields rather than the unobservable state variables with the coefficients of the resultant forecasting relation being endogenously determined by the term structure model. Using term structure data over the 1985 to 2000 sample period, the empirical evidence is consistent with our model more accurately predicting real consumption growth rates than a regression model based on the term spread.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 241 - 258
Copyright
Copyright © School of Business Administration, University of Washington 2005

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