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Does the yield spread predict recessions in the euro area?

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Author Info
Fabio Moneta () (Finance Department, Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467-3808.)
Abstract

This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area. In particular, the historical predictive power of ten 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 threemonth interbank rate outperforms all the other spreads in predicting recessions in the euro area. The result is confirmed when the autoregressive 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 monetary policy purposes. JEL Classification: E44; E52; C53.

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Paper provided by European Central Bank in its series Working Paper Series with number 294.

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Length: 57 pages
Date of creation: Dec 2003
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Handle: RePEc:ecb:ecbwps:20030294

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Keywords: Probit model; forecasting; recessions; yield curve.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marco Del Negro, 2001. "Turn, turn, turn: Predicting turning points in economic activity," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-12. [Downloadable!]
  2. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  3. Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York. [Downloadable!]
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  1. Eva Ferreira & María Isabel Martínez & Eliseo Navarro & Gonzalo Rubio, 2005. "Consumer Confidence and Yield Spreads in Europe," DFAEII Working Papers 200511, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  2. Andersson, Magnus & D'Agostino, Antonello, 2008. "Are sectoral stock prices useful for predicting euro area GDP?," Research Technical Papers 2/RT/08, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
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