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Please send us an email and we will get back to you as quickly as we can. In contrast, a decrease in the slope of risk premia is associated with either a higher or lower recession probability, depending on the source of the decline.
In recent years, a decrease in the inflation risk-premium slope has been accompanied by a heightened risk of a recession, while a lower real-rate risk-premium slope has been a signal of diminished recession probabilities. This means that not all declines in the yield-curve slope are bad news for the economy, and not all instances of steepening are good news either. Of course, the empirical results we have described in this article do not imply that a yield-curve inversion causes a recession.
Rather, it could be that the slope itself fluctuates to reflect changing expectations about the economy, and these expectations are useful predictors of economic downturns. Furthermore, our results hinge on a number of modeling assumptions. First, we rely on a specific DTSM to parse the expectations and risk premia term-structure components. Second, there are many possible specifications for probit models of recession probabilities.
Our results are robust to a number of alternative modeling choices that we have examined, but certainly not all. The results we discuss here are based on a particular set of choices and are one piece of a broader work in progress aimed at gaining a better understanding of the relationship between the yield curve and the macroeconomy. Also, Arturo Estrella and Gikas A. Rudebusch, Brian P. Sack, and Eric T. Rudebusch and John C. Bauer and Thomas M. Treasury yield curve.
Campbell, Adi Sunderam, and Luis M. For details, see Elizabeth R. DeLong, David M. DeLong, and Daniel L. For example, central bank asset-purchase programs and a strong worldwide demand for safe assets could compress long-term U. Treasury yields. Hence, in such an environment a decline in the yield-curve slope might not have the significance that the historical record would suggest.
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The yield-curve slope and recession risk The literature has focused on many different measures of the yield-curve slope, or term spread. Conclusion Why is an inverted yield-curve slope such a powerful predictor of future recessions? Crossref 6 The six-quarter-ahead forward rate is the implicit interest rate on a three-month Treasury bill six quarters in the future that is embedded in market pricing; it is calculated by looking at the difference between the current market price of Treasury securities maturing in seven quarters and the price of those maturing in six quarters.
Crossref 12 This is based on a nonparametric test of equal areas under the receiver operating characteristic ROC curves that evaluates the probability of detecting a recession against the probability of a false positive.
Crossref 13 In addition, other factors could confound the signal in the yield-curve slope. Opinions expressed in this article are those of the author s and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. If you have to take spanish, take her class.
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