The Slope of the Term Structure and Recessions: Evidence from the UK, 1822-2016

Charles Goodhart, Terence Mills and Forrest Capie

No 13519, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates whether the inversion of the yield spread, with short-term rates higher than the long-term rate, has been and remains an effective predictor of recessions in the U.K. using monthly data from 1822 to 2016. Indicators of recession are constructed in a variety of ways depending on the availability and properties of the data in the pre-World War 1, inter-war, and post-World War 2 periods. It is found that, using peak-to-trough recession indicators and a probit regression model, there is reasonably strong evidence to support the inverted yield spread being a predictor of recessions for lead times up to eighteen months in all three periods.

Keywords: Yield spread; Recession; Prediction; Probit models (search for similar items in EconPapers)
JEL-codes: E30 E32 E43 E44 N10 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-his and nep-mac
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Citations: View citations in EconPapers (2)

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