Working Paper: NBER ID: w16398
Authors: Menzie D. Chinn; Kavan J. Kucko
Abstract: In recent years, there has been renewed interest in the yield curve (or alternatively, the term premium) as a predictor of future economic activity. In this paper, we re-examine the evidence for this predictor, both for the United States, as well as European countries. We examine the sensitivity of the results to the selection of countries, and time periods. We find that the predictive power of the yield curve has deteriorated in recent years. However there is reason to believe that European country models perform better than non-European countries when using more recent data. In addition, the yield curve proves to have predictive power even after accounting for other leading indicators of economic activity.
Keywords: Yield Curve; Economic Activity; Predictive Power; Recession
JEL Codes: C22; E37; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| yield curve (E43) | predictive power (C52) |
| predictive power of yield curve (E43) | changes in monetary policy and economic conditions (E49) |
| yield spread (E43) | predictive power deterioration (C53) |
| yield spread (E43) | annual industrial production growth (O49) |
| yield spread (E43) | French industrial production growth (N14) |
| short-term interest rate (E43) | predictive accuracy of recession models (E17) |