SDS - The Modified Yield Curve And Growth Prospects Through 2019
Editor's note: This article was originally published on February 3, 2019, by Menzie Chinn here.
It's kind of limiting to look only at recessions as predicted by the yield curve. What about growth?
I run regressions of 4-quarter GDP growth (in log terms) as a function of one-year lagged 10 year-3 month Treasury spread, the spread augmented by one-year lagged economic policy uncertainty (EPU, from Baker, Bloom and Davis), and spread augmented by EPU and contemporaneous 4-quarter growth in potential GDP.
Figure 1: 4-quarter growth rate in real GDP (dark blue), predicted from 10