Does the term structure predict recessions? The international evidence

Bernard, Henri; Gerlach, Stefan

doi:10.1002/(sici)1099-1158(199807)3:3<195::aid-ijfe81>3.0.co;2-m

Cited by 139 publications

(135 citation statements)

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“…However, these issues are of growing policy interest. They feature prominently in the ongoing discussions on Bernard and Gerlach (1998), using probit estimation, find that the slope of the yield curve in the US and Germany helps predict recessions in other G7 countries, the UK and Japan, in particular, significantly. Those earlier contributions have two main features, however.…”

Section: International Financial Linkagessupporting

confidence: 84%

“…Clearly, such issues are of growing policy relevance, given the recent emphasis put on global financial issues and spillovers in the ongoing discussions on the future of the international monetary system and the IMF (IMFC, 2006). Again, only a couple of studies have somewhat touched upon these issues (Plosser and Rouwenhorst, 1994;Bernard and Gerlach, 1998). Those earlier contributions have ignored inflation and focused on a small number of industrial economies, however.…”

Section: Introductionmentioning

confidence: 99%

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The Yield Curve as a Predictor and Emerging Economies

Mehl

2008

Open Econ Rev

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Conclusions 27References 30 Figures and tables 34European Central Bank Working Paper Series 53 ABSTRACTThis paper investigates the extent to which the slope of the yield curve in emerging economies predicts domestic inflation and growth. It also examines international financial linkages and how the US and the euro area yield curves help to predict. It finds that the domestic yield curve in emerging economies has in-sample information content even after controlling for inflation and growth persistence, at both short and long forecast horizons, and that it often improves out-of-sample forecasting performance. Differences across countries are seemingly linked to market liquidity. The paper further finds that the US and the euro area yield curves also have in-and out-of-sample information content for future inflation and growth in emerging economies. In particular, for emerging economies that have an exchange rate peg to the US dollar, the US yield curve is often found to be a better predictor than these economies' own domestic curve and to causally explain their movements. This suggests that monetary policy changes and short-term interest rate pass-through are key drivers of international financial linkages through movements from the low end of the yield curve. Non-technical summaryThis paper investigates the extent to which the slope of the yield curve in emerging economies predicts domestic inflation and growth. It also examines international financial linkages and how the US and the euro area yield curves help to predict.To this end, the paper uses a sample of 14 emerging economies to investigate the usefulness of their domestic slope of the yield curve to forecast inflation and growth over the last decade. It finds that the yield curve has information content in almost all countries, even after controlling for inflation and growth persistence, at both short and long forecast horizons. On average, insample results suggest that, further to a 100 basis points steepening in the domestic yield curve observed a year and a half ago, both inflation and growth are expected to accelerate by around 30basis points a year ahead. Differences across emerging economies are seemingly linked to market liquidity.In examining international financial linkages, the paper assesses the ability of the slope of the US or the euro area yield curve to help predict inflation and growth in emerging economies. It finds that the US and the euro area yield curves also have in-and out-of-sample information content for future inflation and growth in these economies. On average, in-sample results suggest that, further to a 100 basis points steepening in the foreign yield curve observed a year and a half ago, emerging market inflation is expected to accelerate by around 60 basis points a year ahead, against 2 percentage points for growth. There is evidence that differences across emerging economies are linked to the exchange rate regime, controlling for relative market liquidity and commonalities in economic shocks. In particular, for those econo...

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Section: International Financial Linkagessupporting

confidence: 84%

Section: Introductionmentioning

confidence: 99%

The Yield Curve as a Predictor and Emerging Economies

Mehl

2008

Open Econ Rev

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“…Thus, an increasing term structure indicates that the market expects an increase in short rates in the future. At the macroeconomic level, the slope of the yield curve is often used as an indicator of economic growth (Fama and French 1989;Estrella and Hardouvelis 1991;Estrella and Mishkin 1998;Bernard and Gerlach 1998). Indeed, an increase in the slope indicates economic growth while a decrease in the slope of the term structure, even turning negative, reflects an economic recession.…”

Section: Theoretical and Empirical Backgroundmentioning

confidence: 99%

Modelling credit spreads with time volatility, skewness, and kurtosis

Clark

Baccar

2015

Ann Oper Res

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This paper seeks to identify the macroeconomic and financial factors that drive credit spreads on bond indices in the US credit market. To overcome the idiosyncratic nature of credit spread data reflected in time varying volatility, skewness and thick tails, it proposes asymmetric GARCH models with alternative probability density functions. The results show that credit spread changes are mainly explained by the interest rate and interest rate volatility, the slope of the yield curve, stock market returns and volatility, the state of liquidity in the corporate bond market and, a heretofore overlooked variable, the foreign exchange rate. They also confirm that the asymmetric GARCH models and Student-t distributions are systematically superior to the conventional GARCH model and the normal distribution in in-sample and out-of-sample testing.

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“…Since then a significant amount of empirical evidence has been conducted to test the existence of relationship between yield spread and real economic activity. The literature on term spreads uses different measures of yield spread 7 . The adage that an inverted yield curve signals a recession was formalized empirically, by a number of researchers in the late 1980s, including Laurent (1988Laurent ( , 1989, Campbell Harvey (1988, 1989, Stock and Watson (1989), Chen (1991), and Estrella and Hardouvelis (1991).…”

Section: Survey Of Literaturementioning

confidence: 99%