Does the yield spread predict recessions in the euro area?
AbstractThis paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area. In particu-lar, the historical predictive power of ten yield spreads, for di®erent 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 the other spreads in predicting recessions in the euro area. The result is con¯rmed when the au-toregressive series of the state of the economy is added in the same model. The forecast accuracy of the spread between 10-year and 3-month interest rates is explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information which goes beyond the information already available in the history of output, providing further evidence of the potential usefulness of this indicator for mon-etary policy purposes. JEL Classification: E44, E52, C53
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Date of creation: Dec 2003
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Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-BEC-2005-10-04 (Business Economics)
- NEP-FMK-2005-10-04 (Financial Markets)
- NEP-FOR-2005-10-04 (Forecasting)
- NEP-IFN-2005-10-04 (International Finance)
- NEP-MAC-2005-10-04 (Macroeconomics)
- NEP-MON-2005-10-04 (Monetary Economics)
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