Working Paper: CEPR ID: DP1892
Authors: Henri Bernard; Stefan Gerlach
Abstract: Following Estrella and Hardouvelis (1991) and Estrella and Mishkin (1995a, b), we study the ability of the term structure to predict recessions in eight countries. The results are four-fold. First, the yield curve predicts future recessions in all countries. Second, term spreads forecast recessions as much as two years ahead. Third, while German and US spreads are frequently significant in the regressions for the other countries, the added information is limited, except in Japan and the United Kingdom. Fourth, while leading indicators contain information beyond that in term spreads, this information is only useful for forecasting recessions in the immediate future. These findings provide further evidence of the potential usefulness of term spreads as indicators for monetary policy purposes.
Keywords: term structure of interest rates; monetary policy; probit regressions
JEL Codes: E5; E32; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| slope of the yield curve (E43) | probability of a recession (E37) |
| term spreads (G10) | future recessions (E32) |
| leading indicators (E32) | predictive power of term spreads (E43) |
| German term spreads (B53) | Japanese recessions (F44) |
| U.S. term spreads (E43) | United Kingdom recessions (N14) |