The Predictive Power of the Yield Curve across Countries and Time

Abstract

In recent years, there has been renewed interest in the yield curve (or alternatively, the term premium) as a predictor of future economic activity. In this paper, we re-examine the evidence for this predictor, both for the United States, as well as European countries. We examine the sensitivity of the results to the selection of countries, and time periods. We find that the predictive power of the yield curve has deteriorated in recent years. However there is reason to believe that European country models perform better than non-European countries when using more recent data. In addition, the yield curve proves to have predictive power even after accounting for other leading indicators of economic activity.