EconPapers    
Economics at your fingertips  
 

Indicator Properties of the Paper—Bill Spread: Lessons from Recent Experience

Kenneth Kuttner () and Benjamin Morton Friedman

Scholarly Articles from Harvard University Department of Economics

Abstract: A feature of U.S. postwar business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and Treasury bills to widen shortly before the onset of recessions. By contrast, the paper—bill spread did not anticipate the 1990–1991 recession. Empirical work presented in this paper supports two (not mutually exclusive) explanations for this departure from past experience. First, at least part of the paper—bill spread's predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy, but the 1990–1991 recession was unusual in postwar U.S. experience in not being immediately precipitated by tight monetary policy. Second, movements of the spread during the few years just prior to the 1990–1991 recession were strongly influenced by changes in the relative quantities of commercial paper, bank CDs, and Treasury bills that occurred for reasons unrelated to the business cycle. This latter finding in particular sheds light on the important role of imperfect substitutability of different short-term debt instruments in investors' portfolios, and highlights the burdens associated with using relative interest rate relationships as business cycle indicators.

Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Published in The Review of Economics and Statistics

Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/4554251 ... icatorProperties.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:4554251

Access Statistics for this paper

More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().

 
Page updated 2019-09-15
Handle: RePEc:hrv:faseco:4554251