The Slope of the Term Structure and Recessions: Evidence from the UK, 1822-2016

17 Pages Posted: 19 Feb 2019

See all articles by Forrest Capie

Forrest Capie

Bank of England

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Terence C. Mills

Loughborough University - Department of Economics

Date Written: February 2019

Abstract

This paper investigates whether the inversion of the yield spread, with short-term rates higher than the long-term rate, has been and remains an effective predictor of recessions in the U.K. using monthly data from 1822 to 2016. Indicators of recession are constructed in a variety of ways depending on the availability and properties of the data in the pre-World War 1, inter-war, and post-World War 2 periods. It is found that, using peak-to-trough recession indicators and a probit regression model, there is reasonably strong evidence to support the inverted yield spread being a predictor of recessions for lead times up to eighteen months in all three periods.

Keywords: prediction, probit models, Recession, yield spread

JEL Classification: E30, E32, E43, E44, N10

Suggested Citation

Capie, Forrest and Goodhart, Charles A.E. and Mills, Terence C., The Slope of the Term Structure and Recessions: Evidence from the UK, 1822-2016 (February 2019). CEPR Discussion Paper No. DP13519, Available at SSRN: https://ssrn.com/abstract=3336777

Forrest Capie (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
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020 7601 3680 (Phone)

Charles A.E. Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Terence C. Mills

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain
+44 1509 222703 (Phone)
+44 1509 223910 (Fax)

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