The Predictive Power of the Yield Curve Across Countries and Time

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 article, we re‐examine the evidence for this predictor for both the United States and other advanced economies. We examine the sensitivity of the results to the selection of countries, and to time periods. We find that the predictive power of the yield curve has deteriorated in the last half of the sample period, although there is evidence of a reversal in the lead‐up to the Great Recession. There is reason to believe that European country models perform better than those with non‐European countries when using more recent data. In addition, the yield curve proves to have predictive power even after accounting for other leading indicators of economic activity.