An Examination of the Updated Evidence on the Effectiveness of the Yield Curve as a Macroeconomic Indicator
Wisehaupt, Grant Michael
Area of Honors:
Bachelor of Science
Dr. Russell Paul Chuderewicz, Thesis Supervisor Dr. Russell Paul Chuderewicz, Honors Advisor James R. Tybout, Faculty Reader
yield curve indicator recession Great Recession European debt crisis
The yield curve has historically been the strongest macroeconomic predictor of the United States' economy. Numerous studies have proven it to be superior over the medium and long term to more well-known indicators, like the stock market. Although much of the empirical literature focuses on the United States, there have been similar findings in other countries, primarily Germany and Belgium. With time-series and probit models built using historical GDP and yield data for the United States and selected European countries, this paper examines the evidence of the yield curve's predictive ability from 1999 to 2014. The models contain data from the Great Recession, making the results of particular interest. In general, there was some relationship found between the yield curve and economic activity, but, for a number of possible reasons, the relationship has weakened substantially in recent years.