The term spread and real economic activity in the US inter-war period

Abstract

This paper aims to test the predictive quality of the term spread (difference between long-term and short-term rate of interest) on future economic growth over a period of deflationary price instability, extreme economic circumstance and change in monetary regime. First, it examines the link between the term spread and output growth in the inter-war period for the US economy. Second, it investigates if the information content in the term spread is independent of the short-term rate. Third, it examines the robustness of the relationship in the context of regime changes and tests if the relationship is linear or non-linear.