Campbell R. Harvey
Duke University, Durham, NC 27708, USA
A theory's success is often judged by its out-of-sample performance. Four years ago, I argued that the term structure of interest rates could be used to forecast economic growth.' While the evidence was impressive (almost 50% of the variance in real GNP growth could be explained, and the forecasts were not beaten by any commercially available projections), the model was "fit" on historical data. Since the writing of the paper, we have experienced a complete business cycle. Now we can perform a post mortem on the out-of-sample performance.