Finance and Economics Discussion Series (FEDS)
August 2004
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
PDF: Full Paper
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