March 24, 2023

Term Spreads and Recessions, Country by Country Evidence – a Very Incomplete Review

Dr. Rosser asks what is the evidence for term spreads forecasting economic crises, with special recommendation to Japan. Here is my partial response:

Chinn and Kucko (2015) take a look at data over the 1970-2013 duration, and get the following outcomes:

Source: Chinn and Kucko (2015 ).
The Economist short article on this topic is here.
Note that this requirements includes a three month yield in addition to the 10yr-3mo spread. The outcomes are mostly the same for the simpler requirements using just the spread, except that the spread is then not statistically significant for Japan.
There are certainly numerous other studies of how the term spread forecasts economic downturns or development, for sets of nations; Haubrich (2020) evaluates some of those research studies. See for instance Gebka and Wohar (2018) or Borio, Drehman and Xia (2018 ), or Hasse and Laujaunie (2020 ), so we dont understand what requirements does well for a given nation.
My cautionary tale for China, here.
Flurry of Fed research studies on the term spread in June of this year, Kiley (2022 ), Hornstein (2022 ), and Bauer and Mertens (2022 ).
Ahmed and Chinn (2022) talks about the 10yr-3mo term spread, enhanced by foreign term spread, as a predictor


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