Recession Essay

13394 WordsDec 9, 201054 Pages
FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve Glenn D. Rudebusch Federal Reserve Bank of San Francisco John C. Williams Federal Reserve Bank of San Francisco July 2008 Working Paper 2007-16 http://www.frbsf.org/publications/economics/papers/2007/wp07-16bk.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve∗ Glenn D. Rudebusch† John C. Williams‡ July 2008 Abstract For over two decades, researchers have provided evidence that the yield curve, specifically the spread between long- and short-term interest rates, contains useful information for signaling future recessions. Despite these findings, forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy. Indeed, we show that professional forecasters appear worse at predicting recessions a few quarters ahead than a simple real-time forecasting model that is based on the yield spread. This relative forecast power of the yield curve remains a puzzle. Keywords: yield spread, probability forecasts, real-time For helpful comments, we thank Boragan Aruoba, Frank Diebold, Arturo Estrella, Oscar Jorda, participants at the conference on real-time data analysis held at the Federal Reserve Bank of Philadelphia in 2007, our JBES Editor and Associate Editor, and two anonymous referees. Wayne Huang, Vuong Nguyen, Anjali Upadhyay, and Stephanie Wang provided excellent research assistance. The views expressed in this paper are our own and not necessarily those of others at the Federal Reserve Bank of San

More about Recession Essay

Open Document