The Value of Yield Curve to Predict Recessions - Coursework Example

The term spread is a significant part of various indices of prominent indicators, some of which are inclusive of the Conference Board and the leading index and recession index of Stock and Watson (1989, 1993). Since the yield curve is cited as flat in the current period, the issue is quite contemporary, as the yield curve is modestly inverted as well.

Term spreads play a significant role as a leading indicator because under the expectations attribution, neglecting the term premiums primarily, they measure the difference between the current short-term interest rates and the average of the expected future short-term interest rates over a long and new field of vision. In other words, a term spread is the measure of the pose of the monetary policy in relation to the long-run expectations. With the increment in the term spread, current monetary policy becomes even more restrictive, thereby, giving rise to a recession over the subsequent quarters.

With such a rationale detesting the term premiums, it is not legible to necessarily capture all the information in the yield curve about the liability of a recession by the spread of short-term interest rates over the yield on a long-term bond. The rise in the gradation of current short-term interest rates has no reason for them having identical predictive content for the liabilities of a recession as degradation in the average anticipated future nominal interest rates over, such as for the upcoming decade. However, the usage of the term spread as an overall explanatory constraint has such a connotation. Furthermore, since, it is quite clear from the existence of term premiums, which are time-varying and contribute to typically incrementing in the bond maturity, thereby, complicating the interpretation of spreads between the short- and long-term Treasury yields, the detestation of term premiums seems to be inappropriate. World prominent scholars like Hamilton and Kim, and Ang, Piazzesi and Wei, have made an argument regarding the term premium and anticipations hypothesis constituents of the term spread, as they possess contrasting statistical correlations with the future growth.