The Korean Journal of Economic Studies
Long-term Forecast of Recession Through Monetary Policy and Risk Premium Shock Trends’ Decomposition of Interest Rate Spread
Yun-Yeong Kim (Dankook University)Year 2020Vol. 68No. 3
AbstractThis paper analyzes whether the trend obtained by decomposing the expected portion of the interest rate spread into risk premium shock and monetary policy shock is useful for long-term forecasts of the recession. To do this, after obtaining the Beverage Nelson decomposition of the interest rate term spread from the co-integrated VAR model composed of short-term and long-term interest rates, the long-term expected monetary policy shock and the independent risk premium shock trend are estimated and evaluated. Next, in the linear and probit prediction models, we test whether these trends influence the predictive power of output gap and recession. Based on the proposed method, Korean data were analyzed through the probit model and FM-OLS estimation. In there, we found that the term spread was more effective for short-term forecasts of less than one year, and the trend of monetary policy shock and risk premium shock and risk premium shock were rather more effective for long-term forecasts of 1 year to 2 years.