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March/April 1997, 
Vol. 79, No. 2
Posted 1997-03-01

Strengthening the Case for the Yield Curve as a Predictor of U.S. Recessions

by Michael J. Dueker

Past experience has led financial market participants to believe that future interest rates will be closely related to the performance of the economy. If so, the shape of the yield curve ought to summarize the implicit economic forecasts of a broad range of bond traders. Previous research has demonstrated that, relative to carefully tailored forecasting variables such as the index of leading indicators, the yield curve is an excellent predictor of recessions. The author shows that the predictive power of the yield curve does not diminish when examined in the context of econometric models with more sophisticated baseline forecasts.