Forecasting recessions: the puzzle of the enduring power of the yield curve

Glenn Rudebusch () and John C. Williams ()

No 2007-16, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy.

Keywords: Economic forecasting; Recessions (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Date: 2007
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