Why Does the Yield Curve Predict GDP Growth? The Role of Banks

Camelia Minoiu, Andrés Schneider and Min Wei
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Andrés Schneider: https://www.federalreserve.gov/econres/andres-schneider.htm

No 2025-5, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We show that the slope of the yield curve affects bank lending and economic activity through an "expected bank profitability channel." Using detailed banking data and term premium shocks identified via instrumental variables or event studies, we show that a steeper yield curve—when driven by higher term premiums rather than higher expected short rates—increases bank profits and loan supply. Intuitively, a higher term premium raises the expected returns from maturity transformation—a core banking activity—thereby incentivizing bank lending. This effect is more pronounced for banks with higher leverage. We interpret these findings using a simple bank portfolio model.

Keywords: predictive power of the yield curve; term spread; term premium; bank lending; bank profitability; interest rate risk (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G2 (search for similar items in EconPapers)
Pages: 63
Date: 2025-07-01
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Published in 2025

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Related works:
Working Paper: Why Does the Yield Curve Predict GDP Growth? The Role of Banks (2023)
Working Paper: Why Does the Yield Curve Predict GDP Growth? The Role of Banks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:101197

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DOI: 10.29338/wp2025-05

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