Working Paper: CEPR ID: DP13013
Authors: Stefan Gerlach; Rebecca Stuart
Abstract: This paper studies the information content of the slope of the term structure for recessions, using monthly US data spanning 1857-1913. We find that the term spread predicts future recessions up to about 12 months ahead, as does the current value of the recession dummy. We also find that stock prices are significant in the probit models we use to predict future recessions, but that business failures and growth in industrial production are generally insignificant. Overall, the results give broad support to the findings of Bordo and Haubrich (2004, 2008a, 2008b), who use quarterly data from 1875 to study the ability of the term structure to forecast real GNP growth. C25
Keywords: term structure; recessions; federal reserve
JEL Codes: C25; E00; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| term spread (C41) | likelihood of future recessions (E32) |
| current value of recession dummy (C29) | likelihood of remaining in recession (E32) |
| term spread (C41) | predictive power of recession probabilities (E37) |
| short interest rates (E43) | term spread (C41) |
| long interest rates (E43) | term spread (C41) |
| term spread (C41) | stock prices (G12) |
| business failures (G33) | likelihood of recessions (E32) |
| growth in industrial production (L16) | likelihood of recessions (E32) |