*This paper is a revised version of my European Central Bank (ECB) Working Paper. I would like to thank Jesper Berg, Antonello D'Agostino, John Fell, Stéphane Guéné, Angela Howell, Angela Maddaloni, the editor and two anonymous referees as well as an ECB Working Paper Series referee for their helpful and constructive comments. The views expressed in this paper are solely those of the author and not necessarily those of the European Central Bank.
Does the Yield Spread Predict Recessions in the Euro Area?*
Article first published online: 16 DEC 2005
Volume 8, Issue 2, pages 263–301, Summer 2005
How to Cite
Moneta, F. (2005), Does the Yield Spread Predict Recessions in the Euro Area?. International Finance, 8: 263–301. doi: 10.1111/j.1468-2362.2005.00159.x
- Issue published online: 16 DEC 2005
- Article first published online: 16 DEC 2005
This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area and provides evidence of the potential usefulness of this indicator for monetary policy purposes. In particular, the historical predictive power of ten variations of 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 other spreads in predicting recessions in the euro area. The forecast accuracy of the spread between ten-year and three-month interest rates is also explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information beyond that already available in the history of output, and to outperform other competitor indicators.