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Forecasting recessions: the puzzle of the enduring power of the yield curve

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  • Glenn D. Rudebusch
  • John C. Williams

Abstract

We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-16.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-16

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Keywords: Economic forecasting ; Recessions;

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  1. Arturo Estrella & Mary R. Trubin, 2006. "The yield curve as a leading indicator: some practical issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 12(Jul).
  2. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
  3. 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.).
  4. Sean D. Campbell, 2004. "Macroeconomic volatility, predictability and uncertainty in the Great Moderation: evidence from the survey of professional forecasters," Finance and Economics Discussion Series 2004-52, Board of Governors of the Federal Reserve System (U.S.).
  5. Victor Zarnowitz & Phillip Braun, 1993. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 11-94 National Bureau of Economic Research, Inc.
  6. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  7. Kajal Lahiri & J George Wang, 2006. "Subjective Probability Forecasts for Recessions," Business Economics, Palgrave Macmillan, vol. 41(2), pages 26-37, April.
  8. Peter Tulip, 2005. "Has output become more predictable? changes in Greenbook forecast accuracy," Finance and Economics Discussion Series 2005-31, Board of Governors of the Federal Reserve System (U.S.).
  9. 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 555-76, June.
  10. Joseph G. Haubrich, 2006. "Does the yield curve signal recession?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
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  1. Wisdom of crowds - a puzzle
    by chris dillow in Stumbling and Mumbling on 2008-01-22 14:31:11
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