Does the Yield Spread Predict Recessions in the Euro Area?

59 Pages Posted: 16 Apr 2004

See all articles by Fabio Moneta

Fabio Moneta

Telfer School of Management, University of Ottawa

Abstract

This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area. In particular, the historical predictive power of ten yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the three-month interbank rate outperforms all the other spreads in predicting recessions in the euro area. The result is confirmed when the autoregressive series of the state of the economy is added in the same model. The forecast accuracy of the spread between 10-year and 3-month interest rates is explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information which goes beyond the information already available in the history of output, providing further evidence of the potential usefulness of this indicator for monetary policy purposes.

Keywords: Probit model, forecasting, recessions, yield curve

JEL Classification: E44, E52, C53

Suggested Citation

Moneta, Fabio, Does the Yield Spread Predict Recessions in the Euro Area?. International Finance, Vol. 8, No. 2, pp. 263-301, Summer 2005; ECB Working Paper No. 294. Available at SSRN: https://ssrn.com/abstract=487474

Fabio Moneta (Contact Author)

Telfer School of Management, University of Ottawa ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

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