The Predictive Power of Interest Rates Spread for Economic Activity
Since the 1980s, economists argued that the spread between the long-and short-term interest rates is a good predictor of future economic activity. Developing Estrella (2006) study, I investigate the ability of the interest rate spread to predict USA and Germany recessions using a probit model. The results show that the slope of the yield curve well predicts recession periods. I also compare the performance of the spread to the performance of the Chicago Federal Nation Index (CFNAI) — a credited leading indicator for the economic activity of the US — finding out that the yield-spread based forecast anticipates by several months the CFNAI forecast.
Volume (Year): 97 (2007)
Issue (Month): 6 (November-December)
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