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Consumer Confidence and Yield Spreads in Europe

  • Ferreira García, María Eva
  • Rubio Irigoyen, Gonzalo
  • Martínez, María Isabel
  • Navarro, Eliseo

This paper shows the extraordinary capacity of yield spreads to anticipate consumption growth as proxy by the Economic Sentiment Indicator elaborated by the European Commission in order to predict turning points in business cycles. This new evidence complements the well known results regarding the usefulness of the slope of the term structure of interest rates to predict real economic conditions and, in particular, recessions by using a direct measure of expectations. A linear combination of European yield spreads explains a surprising 93.7% of the variability of the Economic Sentiment Indicator. Yield spreads seem to be a key determinant of consumer confidence in Europe.

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Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2005-11.

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Date of creation: Feb 2005
Date of revision:
Handle: RePEc:ehu:dfaeii:200511
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Order Information: Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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  1. Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
  2. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
  3. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  4. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  5. Jonathan A. Parker, 2003. "Consumption Risk and Expected Stock Returns," NBER Working Papers 9548, National Bureau of Economic Research, Inc.
  6. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  7. Moneta, Fabio, 2003. "Does the yield spread predict recessions in the euro area?," Working Paper Series 0294, European Central Bank.
  8. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
  9. Jeffrey C. Fuhrer, 1993. "What role does consumer sentiment play in the U.S. macroeconomy?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 32-44.
  10. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  11. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  12. Sydney C. Ludvigson, 2004. "Consumer Confidence and Consumer Spending," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 29-50, Spring.
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