Changes in the Informational Content of the Spread: Is Monetary Policy Becoming Less Effective?
AbstractWe examine how the predictive power of term spreads as predictors of economic recessions in Europe and the US has changed in the last two decades. In particular, we focus on the power of domestic and of US and German term spreads to predict real economic activity. Using a battery of methodologies that include endogenous changepoint detection we find that the predictive power of spreadtype variables has changed significantly after the 1980s: in the most advanced countries the domestic spread has lost its informative content in favor of the US spread, whereas in other, less developed countries, this informational content has appeared during the late 1980s. Other predictive variables examined are shown to add little information over term spreads. Given the theoretical arguments that support the predictive power, these findings suggest that domestic monetary policy may have become less effective with respect to real activity in the most developed countries of the sample.
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Bibliographic InfoPaper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 05/07.
Length: 35 pages
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Publication status: Published, Journal of Economics and Business 60 (2008), 415–435
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Web page: http://www.unav.es/facultad/econom
Interest Rate Spread; Recession; Forecast; Europe;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
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