Open AccessShape Evolution of the Interest Rate Term Structure
Author(s) -
Biwei Chen
Publication year - 2021
Publication title -
review of economic analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.101
H-Index - 1
ISSN - 1973-3909
DOI - 10.15353/rea.v13i3.4698
Subject(s) - yield curve , recession , treasury , yield (engineering) , term (time) , interest rate , business cycle , econometrics , economics , keynesian economics , monetary economics , geography , physics , archaeology , quantum mechanics , thermodynamics
This paper adopts a novel approach to studying the evolution of interest rate term structure over the U.S. business cycles and to predicting recessions. Applying an effective algorithm, I classify the Treasury yield curve into distinct shapes and find the less frequent shapes intrinsically linked to the recessions in the post-WWII data. In forecasting recessions, the median-short yield spread trumps the long-short spread for horizons up to 17 months ahead and the yield curve shape is nearly impressive as the median-short spread. Overall, the yield curve shape is an informative but more succinct indicator than the spreads in studying the term structure. Key words: Business cycle, recession forecast, U.S. Treasury yield curve, yield spreads.