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The yield spread as a predictor of economic activity in Mexico: the role of the term premium

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  • Ibarra, Raul

Abstract

This paper analyzes whether there exists a relationship between the slope of the yield curve and future economic activity in Mexico for the period 2004–2019. In particular, we evaluate whether such a relationship depends on the term premium. For this purpose, we estimate a threshold model in which the relationship between the yield spread and economic activity, measured as either output growth or the probability of a contraction, depends on whether the term premium is above or below a certain threshold. The main results indicate that the slope of the yield curve seems to anticipate the behavior of economic activity only when the term premium is above a threshold. Our results also suggest that the slope of the yield curve has predictive power over the probability of facing a contraction in the future only when the term premium is above a threshold.

Suggested Citation

  • Ibarra, Raul, 2023. "The yield spread as a predictor of economic activity in Mexico: the role of the term premium," LSE Research Online Documents on Economics 120717, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:120717
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    File URL: https://researchonline.lse.ac.uk/id/eprint/120717/
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    References listed on IDEAS

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    1. Ben S. Bernanke, 2006. "Reflections on the yield curve and monetary policy," Speech 175, Board of Governors of the Federal Reserve System (U.S.).
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    3. Raul Ibarra, 2016. "How important is the credit channel in the transmission of monetary policy in Mexico?," Applied Economics, Taylor & Francis Journals, vol. 48(36), pages 3462-3484, August.
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    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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