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A Divisia User Cost Interpretation of the Yield Spread Recession Prediction

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  • Ryan S. Mattson

    (The Center for Financial Stability, 1120 Avenue of the Americas, 4th Floor, New York, NY 10036, USA
    Department of Accounting, Economics and Finance, West Texas A&M University, 2501 4th Avenue, Canyon, TX 79016, USA)

Abstract

A re-evaluation of the role of interest rates is necessary in the wake of the Great Recession. This paper will re-evaluate the interpretation and empirical use of the yield spread as a predictor of recessions, focusing on the simplified methodology in a New York Federal Reserve Bank paper by Estrella and Trubin. Using the user cost difference formula to calculate bond prices following the methodology in the Divisia literature begun by William A. Barnett and a unique data set from the Center for Financial Stability, the yield spread is shown to be a form of the user cost difference, and use of the user cost is shown to marginally improve the predictive abilities of the yield spread. Further research into this view of the link of interest rates and economic activity is proposed.

Suggested Citation

  • Ryan S. Mattson, 2019. "A Divisia User Cost Interpretation of the Yield Spread Recession Prediction," JRFM, MDPI, vol. 12(1), pages 1-9, January.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:1:p:7-:d:195284
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    References listed on IDEAS

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    Cited by:

    1. Dongfeng Chang & Ryan S. Mattson & Biyan Tang, 2019. "The Predictive Power of the User Cost Spread for Economic Recession in China and the US," IJFS, MDPI, vol. 7(2), pages 1-12, June.

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