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The central bank as shaper and observer of events: The case of the yield spread

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  • Anna Florio

Abstract

The yield spread has commonly been employed as a successful predictor of economic growth and recessions, although its marginal predictive power has decreased since the 1990s. Notably, the yield spread's declining power to predict US economic activity coincided with its growing power to predict US interest rate changes. In my view, these phenomena are inevitably linked and share one cause. The central bank intended to enhance both its transparency and credibility through greater information disclosure; this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity. La banque centrale en tant que conformateur et observateur des événements: le cas de l'écart de rendements. On utilise souvent l'écart de rendements pour prédire la croissance économique et les récessions, même si la puissance prédictive marginale a décru depuis les années 1990s. On a noté que la capacité de prédiction de l'écart de rendements pour le niveau d'activité économique aux États‐Unis a décliné à proportion que le pouvoir de prédiction du taux d'intrérêt a cru. De l'avis de l'auteur, ces phénomènes sont inévitablement liés et sont le résultat d'une seule cause. La banque centrale veut augmenter sa transparence et sa crédibilité en dévoilant de plus en plus d'informtion; cela a amélioré la prévisibilité du taux d'intérêt mais a peut aussi réduit l'utilité de l'information privée contenue dans l'écart de rendements qui aidait à prédire le niveau d'activité économique.

Suggested Citation

  • Anna Florio, 2016. "The central bank as shaper and observer of events: The case of the yield spread," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(1), pages 320-346, February.
  • Handle: RePEc:wly:canjec:v:49:y:2016:i:1:p:320-346
    DOI: 10.1111/caje.12199
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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