Do Foreign Yield Curves Predict U.S. Recessions and GDP Growth?

32 Pages Posted: 5 May 2022 Last revised: 14 Nov 2023

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: April 24, 2022

Abstract

Foreign term spreads constructed from bond yields of non-U.S. G-7 constituents predict future U.S. recessions and foreign term spreads are stronger predictors of U.S. recessions occurring within the next year than U.S. term spreads. U.S. and foreign term spreads are both informative of the U.S. economy but over different horizons and for different components of economic activity. Smaller U.S. term spreads lead to smaller foreign term spreads and U.S. Dollar appreciation. Smaller foreign term spreads do not lead to significant U.S. Dollar depreciation but do lead to persistent declines in U.S. exports and FDI flows into the United States. These findings are consistent with the proposition that foreign term spreads embed growth spillovers from the U.S. and the resulting Dollar strength and slowdown abroad spill back to the United States.

Keywords: Common factors, Global interest rates, Leading indicator, Spillovers

JEL Classification: E32, E43, E44, F3, G1

Suggested Citation

Ahmed, Rashad and Chinn, Menzie David, Do Foreign Yield Curves Predict U.S. Recessions and GDP Growth? (April 24, 2022). Available at SSRN: https://ssrn.com/abstract=4097006 or http://dx.doi.org/10.2139/ssrn.4097006

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

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Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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United States
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