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The Continuing Power of the Yield Spread in Forecasting (2014)
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BibTeX
@MISC{Croushore14thecontinuing,
author = {Dean Croushore and Katherine Marsten and Dean Croushore and Katherine Marsten},
title = {The Continuing Power of the Yield Spread in Forecasting},
year = {2014}
}
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Abstract
In this paper, we replicate the main results of Rudebusch and Williams (2009), who show that the use of the yield spread in a probit model can predict recessions better than the Survey of Professional Forecasters. We investigate the robustness of their results in several ways: extending the sample to include the 2007– 09 recession, changing the starting date of the sample, changing the ending date of the sample, using rolling windows of data instead of just an expanding sample, and using alternative measures of the “actual ” value of real output. Our results show that the Rudebusch-Williams findings are robust in all dimensions. Keywords: real-time data, recession forecasts, yield spread Economists ’ ability to predict recessions is limited because recessions are often caused by shocks that cannot be anticipated. For example, the 1990–91 recession seems to have been caused by the sudden rise in oil prices at the start of the Gulf War. Nonetheless, because the impact of recessions is so substantial, economists devote much time to the effort of predicting them. The strong correlation between the yield spread (the interest rate on a long-term bond minus the interest rate on a short-term bond) and recessions has led economists to use the spread as a
Keyphrases
yield spread interest rate yield spread economist ability professional forecaster much time oil price recession forecast strong correlation real output gulf war rudebusch-williams finding several way short-term bond real-time data actual value long-term bond probit model main result alternative measure sudden rise
