Yield spreads, currency movements, and recession predictability for southern border economies in the United States

Abstract

ABSTRACTPrior research establishes that the spread between long- and short-term bond yields often provides valuable information for predicting business cycle downturns. This study examines the predictive capacity of the yield spread for the United States metropolitan economies situated along the border with Mexico. Because of the location of these urban economies and various economic ties linking them with twin cities across the border, the Mexico yield spread, and the real dollar/peso exchange rate are also employed as potential recession predictors. Results suggest that a flattening of the yield curve for either country tends to increase the probability of recessions in border economies. Furthermore, declines in the real value of the peso, which are typically associated with greater cross-border manufacturing activity, are found to reduce recession likelihoods in the metropolitan economies examined on the north side of the international boundary.