Indicator Properties of the Paper-Bill Spread: Lessons from Recent Experiences

36 Pages Posted: 11 Sep 2000 Last revised: 18 Aug 2010

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Kenneth N. Kuttner

Williams College; National Bureau of Economic Research (NBER)

Date Written: December 1994

Abstract

A feature of U.S. post-war business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and Treasury bills to widen shortly before the onset of recessions. By contrast, the paper- bill spread did not anticipate the 1990-91 recession. Empirical work presented in this paper supports two (not mutually exclusive) explanations for this departure from past experience. First, at least part of the paper-bill spread's predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy, but the 1990-91 recession was unusual in post-war U.S. experience in not being immediately precipitated by tight monetary policy. Second, movements of the spread during the few years just prior to the 1990-91 recession were strongly influenced by changes in the relative quantities of commercial paper, bank CDs and Treasury bills that occurred for reasons unrelated to the business cycle. This latter finding in particular sheds light on the important role of imperfect substitutability of different short-term debt instruments in investors portfolios, and highlights the burdens associated with using relative interest rate relationships as business cycle indicators.

Suggested Citation

Friedman, Benjamin M. and Kuttner, Kenneth N., Indicator Properties of the Paper-Bill Spread: Lessons from Recent Experiences (December 1994). NBER Working Paper No. w4969. Available at SSRN: https://ssrn.com/abstract=226568

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 127
Cambridge, MA 02138
United States
617-495-4246 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kenneth N. Kuttner

Williams College ( email )

326 Schapiro Hall
24 Hopkins Hall Drive
Williamstown, MA 01267
United States
413-597-2300 (Phone)

HOME PAGE: http://econ.williams.edu/people/knk1

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
1,119
PlumX Metrics