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The slope of the term structure and recessions: evidence from the UK, 1822-2016

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  • Goodhart, C. A. E.
  • Mills, Terence C.
  • Capie, Forrest

Abstract

This paper investigates whether the inversion of the yield spread, with short-term rates higher than the long-term rate, has been and remains an effective predictor of recessions in the U.K. using monthly data from 1822 to 2016. Indicators of recession are constructed in a variety of ways depending on the availability and properties of the data in the pre-World War 1, inter-war, and post-World War 2 periods. It is found that, using peak-to-trough recession indicators and a probit regression model, there is reasonably strong evidence to support the inverted yield spread being a predictor of recessions for lead times up to eighteen months in all three periods

Suggested Citation

  • Goodhart, C. A. E. & Mills, Terence C. & Capie, Forrest, 2019. "The slope of the term structure and recessions: evidence from the UK, 1822-2016," LSE Research Online Documents on Economics 100092, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:100092
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    File URL: http://eprints.lse.ac.uk/100092/
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    References listed on IDEAS

    as
    1. Gerlach, Stefan & Stuart, Rebecca, 2018. "The Slope of the Term Structure and Recessions: The Pre-Fed Evidence, 1857-1913," CEPR Discussion Papers 13013, C.E.P.R. Discussion Papers.
    2. Capie, Forrest H & Mills, Terence C, 1991. "Money and Business Cycles in the U.S. and U.K., 1870 to 1913," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(0), pages 38-56, Supplemen.
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    Cited by:

    1. Maximilian C. Brill & Dieter Nautz & Lea Sieckmann, 2021. "Divisia monetary aggregates for a heterogeneous euro area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 247-278, February.

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    More about this item

    Keywords

    prediction; probit models; recession; yield spread;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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