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The yield spread as a predictor of economic activity in Mexico: the role of the term premium

Ibarra, Raul (2023) The yield spread as a predictor of economic activity in Mexico: the role of the term premium. Economía, 22 (1). 153 – 174. ISSN 1529-7470

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Identification Number: 10.31389/eco.415

Abstract

This paper analyzes whether there exists a relationship between the slope of the yield curve and future economic activity in Mexico for the period 2004–2019. In particular, we evaluate whether such a relationship depends on the term premium. For this purpose, we estimate a threshold model in which the relationship between the yield spread and economic activity, measured as either output growth or the probability of a contraction, depends on whether the term premium is above or below a certain threshold. The main results indicate that the slope of the yield curve seems to anticipate the behavior of economic activity only when the term premium is above a threshold. Our results also suggest that the slope of the yield curve has predictive power over the probability of facing a contraction in the future only when the term premium is above a threshold.

Item Type: Article
Official URL: https://economia.lse.ac.uk/
Additional Information: © 2023 The Author(s)
Divisions: LSE
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Date Deposited: 13 Nov 2023 16:00
Last Modified: 08 Apr 2024 20:28
URI: http://eprints.lse.ac.uk/id/eprint/120717

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