Predicting recessions with the term spread – recent evidence from seven countries

Abstract

Using data including the most recent recession and employing two different definitions of recessions, this article examines the ability of the term spread of interest rates to predict recessions for seven countries. The empirical results indicate that the predictive power of the term spread is best for Canada, Germany, the United States and the United Kingdom. It is not solely a result of the link with monetary policy but for the most part reflects information independent of monetary policy actions. The National Bureau of Economic Research (NBER)/Economic Cycle Research Institute (ECRI) chronology of recessions provides the best fit.

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