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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 34, No. 4, pp.521-546
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2021
Received 11 Mar 2021 Revised 01 Sep 2021 Accepted 16 Nov 2021
DOI: https://doi.org/10.22904/sje.2021.34.4.003

Long-term prediction of the United States’ recession through trend decomposition of interest rate term Spread

Yun-Yeong Kim
Yun-Yeong Kim, Professor, Department of International Trade, Dankook University, 126, Jukjeondong, Yongin-si, Gyeonggi-do 448-701, Korea, Tel: 031-8005-3402 yunyeongkim@dankook.ac.kr

JEL Classification: M60

Abstract

This study analyzes whether the trend obtained by decomposing the expected portion of the interest rate term spread into risk premium shock and monetary policy shock is useful for long-term forecasts of the United States’ recession. After the Beverage Nelson decomposition of the interest rate term spread from the co-integrated VAR model composed of short-term and long-term interest rates, the monetary policy and independent risk premium shocks’ trends are estimated and used for the prediction. Using linear and probit prediction models, we test whether these trends are effective for the predictive power enhancement of output gap and recession. Based on the proposed process, United States data were analyzed through the probit model and FM-OLS estimation. We found that the trends of monetary policy shock and risk premium shock clearly have an edge for long-term forecast compared with conventional term spread forecasts.

Keywords:

Economic forecast, risk premium, Term spread

Acknowledgments

I thank God for knowing everything and leading me to the Navotas-Charity-Foundation (http://navotas.or.kr/). I have received all grace through it. I also appreciate the comments of the two referees. However, all remaining errors belong to the author. The present research was supported by the research fund of Dankook University in 2021.

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