A BEJM Topics article.

Abstract

This paper investigates the determinants of the ability of the yield spread to predict output fluctuations conditional on the short rate. In the model of the paper, this predictive power is contingent on the monetary authority's reaction function. In particular, expectations of monetary policy actions are crucial for the spread to predict output. 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.

Submitted: August 19, 2003 · Accepted: September 22, 2004 · Published: September 30, 2004

Originally published in Topics in Macroeconomics.

Recommended Citation

Feroli, Michael (2004) "Monetary Policy and the Information Content of the Yield Spread," Topics in Macroeconomics: Vol. 4 : Iss. 1, Article 13.
Available at: http://www.bepress.com/bejm/topics/vol4/iss1/art13