The impact of structural breaks on the stability of the out-of-sample predictive content of financial variables for Canada's real GDP growth: An encompassing approach

This paper investigates the timing, frequency and the impact of structural breaks on the stability of the predictive content of a large number of financial variables for Canada's output growth. The forecasts are evaluated over two identified out-of-sample regimes using both the equal accuracy and encompassing tests. The results have enabled us to classify all variables into four useful groups. Two of Canada's term spreads near the short-end of the yield curve belong to the group that exhibits strong and stable predictive content at long horizons that are most relevant to monetary policy providing an indication that the Bank of Canada should not discard these spreads from its list of closely watched information variable.