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Does the Yield Spread Predict Recessions in the Euro Area?

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Author Info
Fabio Moneta
Abstract

This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area and provides evidence of the potential usefulness of this indicator for monetary policy purposes. In particular, the historical predictive power of ten variations of yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the three-month interbank rate outperforms all other spreads in predicting recessions in the euro area. The forecast accuracy of the spread between ten-year and three-month interest rates is also explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information beyond that already available in the history of output, and to outperform other competitor indicators. Copyright Blackwell Publishing Ltd. 2005

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Article provided by Blackwell Publishing in its journal International Finance.

Volume (Year): 8 (2005)
Issue (Month): 2 (08)
Pages: 263-301
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Handle: RePEc:bla:intfin:v:8:y:2005:i:2:p:263-301

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  1. Heather Anderson & Mardi Dungey & Denise Osborn & Farshid Vahid, 2007. "Constructing Historical Euro Area Data," Money Macro and Finance (MMF) Research Group Conference 2006 99, Money Macro and Finance Research Group. [Downloadable!]
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  2. Vítor Castro, 2008. "The duration of economic expansions and recessions: More than duration dependence," NIPE Working Papers 18/2008, NIPE - Universidade do Minho. [Downloadable!]
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This page was last updated on 2009-11-22.

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