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Yield Curve As A Predictor Ofrecessions: Evidence From Panel Data

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  • LUIS FELIPE VITAL NUNES PEREIRA
  • HUSEYIN OZTURK

Abstract

In this study, we test empirically whether the slope of the yield curve—yield spread—is a good predictor of recessions. Although the convention in the literature is to use time series, we adopt an unbalanced panel data framework for thirty-two countries in the Organization for Economic Cooperation and Development from 1990 to 2011. This modification allows us to apply this model for countries with short time series. Furthermore, we include four-quarter lagged gross domestic product (GDP) in the model to assure that yield spread is a good predictor of recessions, even when controlling for GDP changes. The results show that with a type I error of 25 percent, the models deliver a power of roughly 63 percent and can be used as an effective instrument to predict recessions one year ahead.
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Suggested Citation

  • Luis Felipe Vital Nunes Pereira & Huseyin Ozturk, 2014. "Yield Curve As A Predictor Ofrecessions: Evidence From Panel Data," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 120, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2012:120
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    File URL: http://www.anpec.org.br/encontro/2012/inscricao/files_I/i7-8b79cc6076f8d60bdd2bdc5962f3f0c1.docx
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    Cited by:

    1. Hasse, Jean-Baptiste & Lajaunie, Quentin, 2022. "Does the yield curve signal recessions? New evidence from an international panel data analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 9-22.
    2. Yutaka Kurihara, 2016. "Term Structure of Interest Rates under Zero or Low Bound: The Recent Japanese Case," Economy, Asian Online Journal Publishing Group, vol. 3(1), pages 19-23.
    3. Berisha, Edmond, 2017. "Yield spread and the income distribution," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 363-377.
    4. Borio, Claudio & Drehmann, Mathias & Xia, Fan Dora, 2020. "Forecasting recessions: the importance of the financial cycle," Journal of Macroeconomics, Elsevier, vol. 66(C).

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