A0864
Title: Using the yield curve to forecast recessions: The role of fragmentation in the Euro area
Authors: Jean-Baptiste Hasse - Universite Catholique de Louvain (Belgium) [presenting]
Quentin Lajaunie - Université Paris Dauphine (France)
Abstract: A new early warning system (EWS) model is developed which is based on the yield curve to forecast recessions. Using a panel logit model and a unique dataset covering 11 Euro area member countries over the period 2001-2021, we empirically show that EWS based on both the level of the short-term government bond rate and the yield spread give better predictive performance than models with the yield spread alone. This result is robust to different econometric specifications, controlling for monetary policy stance and recession risk factors. Furthermore, via an innovative cluster analysis, we give the empirical evidence of the role of the sovereign bond market fragmentation between Core and Periphery European countries. Our results provide a useful toolbox for monitoring economic cycles.
