The yield spread as a predictor of economic activity in Mexico: the role of the term premium

Raul Ibarra

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyzes whether there exists a relationship between the slope of the yield curve and future economic activity in Mexico for the period 2004–2019. In particular, we evaluate whether such a relationship depends on the term premium. For this purpose, we estimate a threshold model in which the relationship between the yield spread and economic activity, measured as either output growth or the probability of a contraction, depends on whether the term premium is above or below a certain threshold. The main results indicate that the slope of the yield curve seems to anticipate the behavior of economic activity only when the term premium is above a threshold. Our results also suggest that the slope of the yield curve has predictive power over the probability of facing a contraction in the future only when the term premium is above a threshold.

Keywords: yield spread; term premium; economic activity (search for similar items in EconPapers)
JEL-codes: C53 E32 E37 E43 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2023-10-05
New Economics Papers: this item is included in nep-fdg and nep-mac
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Published in Economía, 5, October, 2023, 22(1), pp. 153 – 174. ISSN: 1529-7470

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120717

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