What is it about?
The slope of the yield curve is shown to be a good indicator of subsequent real activity and inflation. Models that predict real activity are somewhat more stable than those that predict inflation, and binary models -- predicting either recessions of inflation pick-ups -- are more stable than continuous models.
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Why is it important?
The use of the slope of the yield curve to predict recessions may be employed with a certain confidence in their continued reliability.
Perspectives
All models to predict real activity and inflation developments must be used with caution and it is advisable to subject the models to regular tests for stability in the underlying relation. Such tests are available and employed here.
Dr Sebastian Schich
OECD
Read the Original
This page is a summary of: How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States, The Review of Economics and Statistics, August 2003, The MIT Press,
DOI: 10.1162/003465303322369777.
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