Does the Term Structure Predict Recessions? The International Evidence

BIS Working Paper No. 37

CEPR Discussion Paper Series No. 1892

30 Pages Posted: 13 Dec 2005

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Henri Bernard

Retired

Date Written: May 1998

Abstract

Following Estrella and Hardouvelis (1991) and Estrella and Mishkin (1995a, b), we study the ability of the term structure to predict recessions in eight countries. The results are four-fold. First, the yield curve predicts future recessions in all countries. Second, term spreads forecast recessions as much as two years ahead. Third, while German and U.S. spreads are frequently significant in the regressions for the other countries, the added information is limited, except in Japan and the United Kingdom. Fourth, while leading indicators contain information beyond that in term spreads, this information is only useful for forecasting recessions in the immediate future. These findings provide further evidence of the potential usefulness of term spreads as indicators for monetary policy purposes.

JEL Classification: E5, E32, E43

Suggested Citation

Gerlach, Stefan and Bernard, Henri, Does the Term Structure Predict Recessions? The International Evidence (May 1998). BIS Working Paper No. 37, CEPR Discussion Paper Series No. 1892, Available at SSRN: https://ssrn.com/abstract=125508 or http://dx.doi.org/10.2139/ssrn.125508

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Henri Bernard

Retired ( email )

CH-4002 Basel, Basel-Stadt
Switzerland