FEDERAL RESERVE BOARD

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 believe a re-examination is warranted, both because of the phenomenon of the “conundrum ” in the mid-2000’s, and the advent of the euro in 1999. We examine the sensitivity of the results to the selection of countries, and time periods. We find that the predicative 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. Key words: yield curve, term premium, expectations hypothesis of the term premium, industrial production, recession JEL classification: C22, E37, E43 Acknowledgments: We thank Shaghil Ahmed for useful comments and Paul Eitelman for assistance with data analysis. Catherine Bonser-Neal graciously provided data. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of the NBER