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The central bank as shaper and observer of events: The case of the yield spread
Author(s) -
Florio Anna
Publication year - 2016
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12199
Subject(s) - predictability , recession , credibility , yield (engineering) , credit spread (options) , transparency (behavior) , interest rate , economics , predictive power , monetary economics , macroeconomics , bond , finance , computer science , mathematics , statistics , political science , computer security , philosophy , materials science , epistemology , metallurgy , law
The yield spread has commonly been employed as a successful predictor of economic growth and recessions, although its marginal predictive power has decreased since the 1990s. Notably, the yield spread's declining power to predict US economic activity coincided with its growing power to predict US interest rate changes. In my view, these phenomena are inevitably linked and share one cause. The central bank intended to enhance both its transparency and credibility through greater information disclosure; this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity.