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Do yield curve inversions predict recessions in the euro area?

Author

Listed:
  • Jean-Guillaume Sahuc

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • David Sabes

Abstract

Based on monthly data from 1970 to 2022 and the AUROC performance metric, we show that yield curve inversions generally predict recessions in the euro area. However, there are two important limitations. First, the forecasting capability of the yield curve has tended to weaken since the global financial crisis. Second, the overall performance is driven by eurozone core countries, especially Germany. Risk premia, and more particularly the credit risk component, blur the relationship between the yield curve slope and the probability of a future recession within the so-called periphery countries.

Suggested Citation

  • Jean-Guillaume Sahuc & David Sabes, 2023. "Do yield curve inversions predict recessions in the euro area?," Post-Print hal-03914540, HAL.
    • Handle: RePEc:hal:journl:hal-03914540
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    Cited by:

    1. is not listed on IDEAS
    2. Michail Nerantzidis & Nikolaos Stoupos & Panayiotis Tzeremes, 2024. "Realized Volatility Spillover Connectedness among the Leading European Currencies after the End of the Sovereign-Debt Crisis: A QVAR Approach," JRFM, MDPI, vol. 17(8), pages 1-17, August.
    3. Matthieu Bussière & Stéphane Lhuissier, 2024. "What does an inversion of the yield curve tell us? [Que signifie l’inversion d’une courbe des taux ?]," Bulletin de la Banque de France, Banque de France, issue 250.
    4. Audrino, Francesco & Offner, Eric A., 2024. "The impact of macroeconomic news sentiment on interest rates," International Review of Financial Analysis, Elsevier, vol. 94(C).

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    Keywords

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    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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