The predictive power of the term spread on inequality in the United Kingdom: An empirical analysis

Abstract

A common tool in forecasting literature used in predicting future economic conditions is the term spread, which tends to contract near peaks and rise near troughs. Building on this known relationship, this paper explores the predictive power of the yield spread on the distribution of income in the United Kingdom (UK). The results reveal that income inequality responds negatively to increases in the yield spread over the medium-term. Specifically, we show that the term spread can help to predict UK's income inequality growth both in- and out-of-sample. Our empirical findings show that it is the expected component of the term spread that has predictive power for lower income inequality in the UK.