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Can Yield Curve Inversions Be Predicted?


  • Kurt Graden Lunsford


An inverted Treasury yield curve?a yield curve where short-term Treasury interest rates are higher than long-term Treasury interest rates?is a good predictor of recessions. Because of this, economists and policymakers often assess the risk of a yield curve inversion when the yield curve is flattening. I study the forecastability of yield curve inversions. Professional forecasters did not predict the beginning of the yield curve inversions prior to the 1990?1991, 2001, and 2008?2009 recessions. In all three cases, professional forecasters failed to predict the magnitude of the rise in short-term interest rates. Prior to the 2008?2009 recession, forecasters also overpredicted long-term interest rates.

Suggested Citation

  • Kurt Graden Lunsford, 2018. "Can Yield Curve Inversions Be Predicted?," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2018(06), pages 1-6, July.
  • Handle: RePEc:fip:fedcec:00090
    DOI: 10.26509/frbc-ec-201806

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    References listed on IDEAS

    1. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    2. David C. Wheelock & Mark E. Wohar, 2009. "Can the term spread predict output growth and recessions? a survey of the literature," Review, Federal Reserve Bank of St. Louis, vol. 91(Sep), pages 419-440.
    3. Michael D. Bauer & Thomas M. Mertens, 2018. "Economic Forecasts with the Yield Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    4. Hamilton, James D., 2011. "Calling recessions in real time," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1006-1026, October.
    5. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
    6. James B. Bullard, 2017. "Assessing the Risk of Yield Curve Inversion : a presentation at Regional Economic Briefing, Little Rock, Ark. December 1, 2017," Speech 295, Federal Reserve Bank of St. Louis.
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