Abstract
This paper revisits the yield spread’s usefulness for predicting future real GDP growth. We show
that the contribution of the spread can be decomposed into the effect of expected future changes
in short rates and the effect of the term premium. We find that both factors are relevant for
predicting real GDP growth but the respective contributions differ. We investigate whether the
cyclical behavior of interest rate volatility could account for either or both effects. We find that
while volatility displays important correlations with both the term structure of interest rates and
GDP, it does not appear to account for the yield spread's usefulness for predicting GDP growth.