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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Monetary Policy and the Information Content of the Yield Spread
Michael Feroli

Abstract: This paper demonstrates that the ability of the yield spread to predict output fluctuations is contingent on the monetary authority's reaction function. In particular, expectations of monetary policy actions are crucial for the spread to predict output conditional on the short-rate. Furthermore, numerical experiments suggest that the post-1979 decrease in the yield spread's predictive power is due to a shift in the monetary policy reaction function at that time.

Keywords: Yield spread, business cycles, monetary policy.

Full paper (318 KB PDF)

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Last update: August 26, 2004