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The yield curve, recessions, and the credibility of the monetary regime: long-run evidence, 1875-1997

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  • Michael D. Bordo
  • Joseph G. Haubrich

Abstract

This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 1875-1997. This predictability varies over time, however, particularly across different monetary regimes. In accord with our proposed theory, regimes with low credibility (high persistence of inflation) tend to have better predictability.

Suggested Citation

  • Michael D. Bordo & Joseph G. Haubrich, 2004. "The yield curve, recessions, and the credibility of the monetary regime: long-run evidence, 1875-1997," Working Paper 0402, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0402
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    Cited by:

    1. Roberto Santis, 2015. "Quantity theory is alive: the role of international portfolio shifts," Empirical Economics, Springer, pages 1401-1430.
    2. Kuosmanen, Petri & Vataja, Juuso, 2014. "Forecasting GDP growth with financial market data in Finland: Revisiting stylized facts in a small open economy during the financial crisis," Review of Financial Economics, Elsevier, pages 90-97.
    3. Joseph G. Haubrich & George Pennacchi & Peter H. Ritchken, 2008. "Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Paper 0810, Federal Reserve Bank of Cleveland.
    4. Kuosmanen, Petri & Nabulsi, Nasib & Vataja, Juuso, 2015. "Financial variables and economic activity in the Nordic countries," International Review of Economics & Finance, Elsevier, pages 368-379.
    5. Olivier Darné & Amélie Charles, 2011. "Large shocks in U.S. macroeconomic time series: 1860-1988," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), pages 79-100.
    6. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, pages 799-844.
    7. Kang Kyu Ho & Kim Chang-Jin & Morley James, 2009. "Changes in U.S. Inflation Persistence," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, pages 1-23.
    8. De Santis, Roberto A., 2012. "Quantity theory is alive: the role of international portfolio shifts," Working Paper Series 1435, European Central Bank.
    9. Leo Krippner, 2008. "A Macroeconomic Foundation for the Nelson and Siegel Class of Yield Curve Models," Research Paper Series 226, Quantitative Finance Research Centre, University of Technology, Sydney.
    10. Dalu Zhang & Peter Moffatt, 2012. "The yield curve as a leading indicator in economic forecasting in the U.K," University of East Anglia Applied and Financial Economics Working Paper Series 035, School of Economics, University of East Anglia, Norwich, UK..
    11. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, pages 799-844.
    12. Huseyin Kaya, 2013. "On the Predictive Power of Yield Spread for Future Growth and Recession: The Turkish Case," Working Papers 010, Bahcesehir University, Betam, revised Mar 2013.
    13. Seok-Kyun Hur, 2005. "Money Growth and Interest Rates," NBER Working Papers 11102, National Bureau of Economic Research, Inc.
    14. Boucekkine, Raouf & Krawczyk, Jacek B. & Vallée, Thomas, 2010. "Towards an understanding of tradeoffs between regional wealth, tightness of a common environmental constraint and the sharing rules," Journal of Economic Dynamics and Control, Elsevier, pages 1813-1835.
    15. Anna Florio, 2016. "The central bank as shaper and observer of events: The case of the yield spread," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 320-346, February.
    16. David C. Wheelock & Mark E. Wohar, 2009. "Can the term spread predict output growth and recessions? a survey of the literature," Review, Federal Reserve Bank of St. Louis, pages 419-440.
    17. Benati, Luca & Goodhart, Charles, 2008. "Investigating time-variation in the marginal predictive power of the yield spread," Journal of Economic Dynamics and Control, Elsevier, pages 1236-1272.
    18. repec:kap:ecopln:v:50:y:2017:i:3:d:10.1007_s10644-017-9212-7 is not listed on IDEAS
    19. Olivier Darné & Amélie Charles, 2011. "Large shocks in U.S. macroeconomic time series: 1860-1988," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), pages 79-100.

    More about this item

    Keywords

    Interest rates ; Bonds ; Monetary policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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