Interest rate spreads and output: A time scale decomposition analysis using wavelets

The information content of several interest rate spreads for future output growth is analyzed using wavelet analysis. The ‘‘scale-by-scale’’ regression analysis shows that standard indicators of the stance of monetary policy, such as the shape of the yield curve, the real federal funds rate, and the credit spread have different information content for future output at different time frames. This is consistent with the idea that allowing for different time scales of variation in the data can provide a deeper understanding of the complex dynamics between real and financial variables, certainly richer than those obtainable using standard aggregate regression methods.