Does The Yield Spread Predict Recessions In The Euro Area?

A

ASusilovic

E U R O P E A N C E N T R A L B A N K

WORKING PAPER SERIES

WORKING PAPER NO. 294
DOES THE YIELD SPREAD PREDICT
RECESSIONS IN THE EURO AREA?

8 Conclusion

In this paper the importance of the use of the term spread as predictor of
recessions is con¯rmed also for the euro area. In particular, an analysis of the
predictive content of the slope of the yield curve in di®erent parts was documented.

The results of this paper show that the best predictor of recession
is the spread between 10-year and 3-month interest rates. Therefore, this
speci¯c yield spread appears to contain a useful information for monetary
policy purposes. To arrive to this conclusion we used two non-liner model
speci¯cations to forecast the probability of a recession in the euro area.

http://www.ecb.int/pub/pdf/scpwps/ecbwp294.pdf
 
Quote from ASusilovic:

E U R O P E A N C E N T R A L B A N K

WORKING PAPER SERIES

WORKING PAPER NO. 294
DOES THE YIELD SPREAD PREDICT
RECESSIONS IN THE EURO AREA?

8 Conclusion

In this paper the importance of the use of the term spread as predictor of
recessions is con¯rmed also for the euro area. In particular, an analysis of the
predictive content of the slope of the yield curve in di®erent parts was documented.

The results of this paper show that the best predictor of recession
is the spread between 10-year and 3-month interest rates. Therefore, this
speci¯c yield spread appears to contain a useful information for monetary
policy purposes. To arrive to this conclusion we used two non-liner model
speci¯cations to forecast the probability of a recession in the euro area.

http://www.ecb.int/pub/pdf/scpwps/ecbwp294.pdf
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Interesting. Those two are the precise ones I use when looking at this kind of thing, as the 10 year is the proxy for mortgage rates (the average house's ownership term in the US is around 10 years) and the 3 month is pretty much considered a cash equivalent.
Is 10 years the average term of ownership for a house in Europe?
 
Quote from ASusilovic:
----term spread as predictor of
recessions....
----best predictor of recession....
----spread between 10-year and 3-month interest rates.
More...
1) If short-term rates are ~0%, to have a recession with an inverted yield curve implies that intermediate-term rates will go negative. :eek: :mad: :( :confused: :cool: :p :) :D
2) Suss, I didn't look at the link/paper. :cool:
 
I haven't read the papers, but it would seem to me that central bank buying could distort the curve and hence any conclusions.
 
Quote from jem:

I downloaded your book. I look forward to reading it.
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Thank you for your support.
 
Quote from Martinghoul:
----causality....
----analyses....
----all largely worthless.
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Martin, please please reveal the "Holy Grail" to the rest of us. :confused:
 
Quote from nazzdack:

Martin, please please reveal the "Holy Grail" to the rest of us. :confused:
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My analysis worked on the past debt rates for a certain period then I worked out the mean average and the standard deviation to see what business cycle each country was following and then used it to predict the future debt dependency.

I don't know what Martin uses.
 
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