The Predictive Power of the Yield Curve Across Countries and Time

In recent years, there has been renewed interest in the yield curve (or alternatively, the term premium) as a predictor of future economic activity. In this paper, we re‐examine the evidence for this predictor, both for the United States, as well as European countries. We believe a re‐examination is warranted, both because of the phenomenon of the “conundrum” in the mid‐2000’s, and the advent of the euro in 1999. We examine the sensitivity of the results to the selection of countries, and time periods. We find that the predictive power of the yield curve has deteriorated in recent years. However there is reason to believe that European country models perform better than non-European countries when using more recent data