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Does the yield spread predict recessions in the euro area?

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  • Moneta, Fabio
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    Abstract

    This 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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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0294.

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    Date of creation: Dec 2003
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    Handle: RePEc:ecb:ecbwps:20030294

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    Keywords: forecasting; probit model; recessions; yield curve;

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    1. Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York.
    2. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
    3. 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.
    4. Layton, Allan P. & Katsuura, Masaki, 2001. "Comparison of regime switching, probit and logit models in dating and forecasting US business cycles," International Journal of Forecasting, Elsevier, vol. 17(3), pages 403-417.
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    Cited by:
    1. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    2. Vladimir Dubrovskiy & Inna Golodniuk & Janusz Szyrmer, 2009. "Composite Leading Indicators for Ukraine: An Early Warning Model," CASE Network Reports 0085, CASE-Center for Social and Economic Research.
    3. Ferreira García, María Eva & Rubio Irigoyen, Gonzalo & Martínez, María Isabel & Navarro, Eliseo, 2005. "Consumer Confidence and Yield Spreads in Europe," DFAEII Working Papers 2005-11, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 131-141.
    5. Gerit Vogt, 2004. "Prognose von Umsatz und Bruttowertschöpfung des verarbeitenden Gewerbes in Sachsen für das Jahr 2004 (Prognose der Bruttowertschöpfung des sächsischen verarbeitenden Gewerbes 2004)," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 11(04), pages 23-30, 08.
    6. Andersson, Magnus & D’Agostino, Antonello, 2008. "Are sectoral stock prices useful for predicting euro area GDP?," Working Paper Series 0876, European Central Bank.
    7. Pederzoli, Chiara & Torricelli, Costanza, 2005. "Capital requirements and business cycle regimes: Forward-looking modelling of default probabilities," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3121-3140, December.
    8. Benjamin Ford & Karen Taylor, 2005. "Recent developments in Australian bond yields," Economic Roundup, Treasury, Australian Government, issue 4, pages 111-120, December.
    9. Ivan Paya & Agustín Duarte & Ioannis A. Venetis, 2004. "Predicting Real Growth And The Probability Of Recession In The Euro Area Using The Yield Spread," Working Papers. Serie AD 2004-31, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    10. Gerit Vogt, 2009. "Konjunkturprognose in Deutschland. Ein Beitrag zur Prognose der gesamtwirtschaftlichen Entwicklung auf Bundes- und Länderebene," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 36, July.

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