The Term Spread as a Predictor of Financial Instability

Dean Parker and Moritz Schularick

No 20211124, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The term spread is the difference between interest rates on short- and long-dated government securities. It is often referred to as a predictor of the business cycle. In particular, inversions of the yield curve—a negative term spread—are considered an early warning sign. Such inversions typically receive a lot of attention in policy debates when they occur. In this post, we point to another property of the term spread, namely its predictive ability for financial crisis events, both internationally and in historical U.S. data. We study the predictive power of the term spread for financial instability events in the United States and internationally over the past 150 years.

Keywords: yield curves; financial crisis (search for similar items in EconPapers)
JEL-codes: E5 E58 G01 N0 (search for similar items in EconPapers)
Date: 2021-11-24
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-his, nep-mac and nep-mon
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