Improving a Term Spread Model to Forecast U.S. Output Growth

The ability of term spread to forecast U.S. output growth could be improved by two ways: (i) Combining with the Harrod-Domar variable - net saving as a percentage of gross national income - that used to proxy for aggregate supply; and (ii) Using a system of simultaneous equations, in which U.S. gross domestic product (GDP) growth depends only on the effective federal funds rate, to produce conditional forecasts. During the Great Recession besides interest rate policy that increases term spread and output growth lowering the cost of borrowing, a forward guidance quantitative easing policy measured by change in monetary base as a percentage of gross domestic product also positively affects on these two variables raising an optimism about the macroeconomy