Does the Yield Curve Predict Output?
37 Pages Posted: 6 Nov 2020
Date Written: November 6, 2020
Does the yield curve have the ability to predict output and recessions? At some times and in certain places, of course! But many details are matters of dispute: When and where does the yield curve predict successfully, which aspects of the curve matter most, and which economic forces account for the predictive ability? Over the years, an increasingly sophisticated set of tools, both statistical and theoretical, have addressed these issues. For the US, an inverted yield curve, particularly when the spread between the yield on 10-year and 3-month Treasuries becomes negative, has been a robust indicator of recessions in the post-World War Two period. The spread also predicts future real GDP growth for the US, although the forecast ability varies by time period, in ways that appear to depend on monetary policy. The evidence is less clear in other countries, but the yield curve shows some predictive ability for the UK and Germany, among others. [This paper was prepared for and has been submitted to the Annual Review of Financial Economics.]
Keywords: yield curve, term structure, prediction, recessions
JEL Classification: E43, G12, E32
Suggested Citation: Suggested Citation