Does The Yield Spread Predict Recessions In The Euro Area?

Discussion in 'Economics' started by ASusilovic, Nov 14, 2011.

  1. 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
     
  2. 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?
     
  3. 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:
     
  4. Visaria

    Visaria

    I haven't read the papers, but it would seem to me that central bank buying could distort the curve and hence any conclusions.
     
  5. There's a big causality issue with all these analyses, which makes them all largely worthless.
     
  6. jem

    jem

  7. Thank you for your support.
     
  8. Martin, please please reveal the "Holy Grail" to the rest of us. :confused:
     
  9. 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.
     
    #10     Nov 15, 2011