Why Does the Yield-Curve Slope Predict Recessions?

Luca Benzoni, Olena Chyruk and David Kelley

Chicago Fed Letter, 2018, No 404

Abstract: Many studies document the predictive power of the slope of the Treasury yield curve for forecasting recessions.2 This work is motivated, for example, by the empirical evidence in figure 1, which shows the term-structure slope, measured by the spread between the yields on ten-year and two-year U.S. Treasury securities, and shading that denotes U.S. recessions (dated by the National Bureau of Economic Research). Note that the yield-curve slope becomes negative before each economic recession since the 1970s.3 That is, an ?inversion? of the yield curve, in which short-maturity interest rates exceed long-maturity rates, is typically associated with a recession in the near future.

Keywords: Interest rates; recessions (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Working Paper: Why Does the Yield-Curve Slope Predict Recessions? (2018)
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DOI: 10.21033/cfl-2018-404

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