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Does the term structure forecast


Relying on a simple general equilibrium model of the term structure, both nominal yields and real consumption growth rates can be shown to be a±ne 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 coe±cients of the resultant forecasting relation being endogenously determined by the term structure model. In this sense, we use the entire term structure to forecast real consumption growth rates and provide empirical evidence consistent with the model more accurately predicting real consumption growth rates than a regression model based on the term spread.

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