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The Slope of the Term Structure and Recessions: The Pre-Fed Evidence, 1857-1913

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  • Gerlach, Stefan
  • Stuart, Rebecca

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

Suggested Citation

  • Gerlach, Stefan & Stuart, Rebecca, 2018. "The Slope of the Term Structure and Recessions: The Pre-Fed Evidence, 1857-1913," CEPR Discussion Papers 13013, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13013
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    References listed on IDEAS

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    1. Michael D. Bordo & Joseph G. Haubrich, 2004. "The Yield Curve, Recessions and the Credibility of the Monetary Regime: Long Run Evidence 1875-1997," NBER Working Papers 10431, National Bureau of Economic Research, Inc.
    2. Romer, Christina D, 1989. "The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 1-37, February.
    3. Heikki Kauppi & Pentti Saikkonen, 2008. "Predicting U.S. Recessions with Dynamic Binary Response Models," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 777-791, November.
    4. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    5. Michael D. Bauer & Thomas M. Mertens, 2018. "Economic Forecasts with the Yield Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    6. Romer, Christina D., 1988. "World War I and the postwar depression A reinterpretation based on alternative estimates of GNP," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 91-115, July.
    7. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    8. Travis J. Berge & Òscar Jordà, 2011. "Evaluating the Classification of Economic Activity into Recessions and Expansions," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 246-277, April.
    9. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, July.
    10. Adrian, Tobias & Estrella, Arturo, 2008. "Monetary tightening cycles and the predictability of economic activity," Economics Letters, Elsevier, vol. 99(2), pages 260-264, May.
    11. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
    12. Jonathan H. Wright, 2006. "The yield curve and predicting recessions," Finance and Economics Discussion Series 2006-07, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Rebecca Stuart, 2020. "Monetary regimes, the term structure and business cycles in Ireland, 1972–2018," Manchester School, University of Manchester, vol. 88(5), pages 731-748, September.
    2. B. De Backer & M. Deroose & Ch. Van Nieuwenhuyze, 2019. "Is a recession imminent? The signal of the yield curve," Economic Review, National Bank of Belgium, issue i, pages 69-93, June.
    3. Goodhart, C. A. E. & Mills, Terence C. & Capie, Forrest, 2019. "The slope of the term structure and recessions: evidence from the UK, 1822-2016," LSE Research Online Documents on Economics 100092, London School of Economics and Political Science, LSE Library.
    4. Rebecca Stuart, 2020. "The term structure, leading indicators, and recessions: evidence from Switzerland, 1974–2017," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 156(1), pages 1-17, December.
    5. Aitor Erce & Xu Jiang & Diana Zigraiova, 2020. "Quantifying Risks to Sovereign Market Access: Methods and Challenges," Globalization Institute Working Papers 377, Federal Reserve Bank of Dallas.
    6. Goodhart, Charles & Mills, Terence & Capie, Forrest, 2019. "The Slope of the Term Structure and Recessions: Evidence from the UK, 1822-2016," CEPR Discussion Papers 13519, C.E.P.R. Discussion Papers.
    7. Chen, Guojin & Liu, Yanzhen & Zhang, Yu, 2021. "Systemic risk measures and distribution forecasting of macroeconomic shocks," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 178-196.
    8. Mills, Terence C. & Capie, Forrest & Goodhart, C. A. E., 2019. "The slope of the term structure and recessions:: evidence from the UK, 1822 – 2016," LSE Research Online Documents on Economics 100964, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Term structure; Recessions; Federal Reserve;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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