  Several studies have established the predictive power of the yield curve in
terms of real economic activity. In this paper we use data for a variety of
E.U. countries: both EMU (Germany, France, Italy) and non-EMU members (Sweden
and the U.K.). The data used range from 1991:Q1 to 2009:Q1. For each country,
we extract the long run trend and the cyclical component of real economic
activity, while the corresponding interbank interest rates of long and short
term maturities are used for the calculation of the country specific yield
spreads. We also augment the models tested with non monetary policy variables:
the countries' unemployment rates and stock indices. The methodology employed
in the effort to forecast real output, is a probit model of the inverse
cumulative distribution function of the standard distribution, using several
formal forecasting and goodness of fit evaluation tests. The results show that
the yield curve augmented with the non-monetary variables has significant
forecasting power in terms of real economic activity but the results differ
qualitatively between the individual economies examined raising non-trivial
policy implications.
