Does an Inverted Yield Curve Predict Recessions?

Abstract

This paper examines the factors that determine the rate of growth of Gross Domestic Product in the U.S. economy for the years 1976-2006, with an emphasis on the role of the yield curve in predicting economic growth. Using multiple regression analyses, I examined the impact of a number of independent variables, including year, year-squared, the money supply, the unemployment rate, the lag distribution of unemployment, the inflation rate, the lag distribution of the inflation rate, the current account balance, the lag distribution of the current account, and the yield curve. I found that an inverted yield curve raises the probability of a recession in the next period; this relationship is statistically significant.