Yield Curve Inversion and the Incidence of Recession: A Dynamic IS-LM Model with Term Structure of Interest Rates

X. Wang () and Bill Yang ()

International Advances in Economic Research, 2012, vol. 18, issue 2, 177-185

Abstract: This paper attempts to explain why yield curve inversion may serve as a leading indicator of recessions. It employs an IS-LM model with the term structure of interest rates and provides a formal phase-diagram analysis of dynamic adjustment process. It demonstrates that the occurrence of yield curve inversion is an off-equilibrium phenomenon after an adverse shock in the adjustment process of interest rates and output, and that an inverted yield curve may lead, but does not lead to, a recession. Copyright International Atlantic Economic Society 2012

Keywords: Yield curve inversion; Recession; The IS-LM model; Term structure of interest rates; Phase diagram; E00; E30; E40 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11294-012-9350-7

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