How Stable is the Forecasting Performance of the Yield Curve for Outpot Growth?

We provide an extensive evaluation of the predictive performance of the U.S. yield curve for U.S. GDP growth by using a new test for forecast breakdown as well as a variety of in-sample and out-of-sample testing procedures. Empirical research over the past decades uncovered a strong predictive relationship between the yield curve and output growth. However, the parameter estimates that describe this empirical relationship were not stable over time. We document the existence of a forecast breakdown in this relationship over the past three decades, and find it relevant especially in the seventies and eighties. We also provide empirical support for the theoretical conjecture that the cause of the forecast failure is closely linked to changes in the monetary policy of the Fed.