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Does the term structure predict recessions? The international evidence
Author(s) -
Bernard Henri,
Gerlach Stefan
Publication year - 1998
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199807)3:3<195::aid-ijfe81>3.0.co;2-m
Subject(s) - recession , economics , yield curve , term (time) , econometrics , yield (engineering) , german , monetary policy , monetary economics , macroeconomics , interest rate , geography , physics , materials science , quantum mechanics , archaeology , metallurgy
Following Estrella and Hardouvelis (1991) and Estrella and Mishkin (1995a, b), we study the ability of the term structure to predict recessions in eight countries. The results are fourfold. First, the yield curve predicts future recessions in all countries. Second, term spreads forecast recessions as much as 2 years ahead. Third, while German and US spreads are frequently significant in the regressions for the other countries, the added information is limited except in Japan and the UK. Fourth, while leading indicators contain information beyond that in term spreads, this information is only useful for forecasting recessions in the immediate future. These findings provide further evidence of the potential usefulness of term spreads as indicators for monetary policy purposes. © 1998 John Wiley & Sons, Ltd.