Description
Abstract: The difference in yields between long-term and short-term securities has been used both as a business cycle leading indicator and as an indicator of the direction of monetary policy. This paper tests for an asymmetry, in the form of a threshold effect, such that the impact of the yield spread on the conditional expectation of output growth is greater on one side of the threshold than on the other. We test using data from the G-7 countries, and find that, while the yield spread does generally show a significant link with output, only in the United States and Canada is there strong evidence of an asymmetry of this type. This evidence suggests a high value of the threshold in both the United States and Canada.