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Federal Reserve Bank of San Francisco
Working Paper Series
Forecasting recessions: the puzzle of the enduring power of the yield curve
Glenn D. Rudebusch
John C. Williams
Abstract

We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy.


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Glenn D. Rudebusch & John C. Williams, Forecasting recessions: the puzzle of the enduring power of the yield curve, Federal Reserve Bank of San Francisco, Working Paper Series 2007-16, 2007.
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Keywords: Economic forecasting ; Recessions
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