Are formal models needed to extract the information content in the yield curve, or are there also rules of thumb?
A. Much of the research on this topic has been based on formal statistical models, such as linear regressions and non-linear statistical equations. These models are useful in that they provide quantitative guidelines about the sensitivity of output growth to changes in the term spread and about the precise lead-lag relationships exhibited by the data series, as well as recession probabilities. Nevertheless, simple rules of thumb are available, such as the fact that yield curve inversions (negative term spreads) are followed by recessions. Estrella and Mishkin (1996b) and Estrella (2005b) show that this approach may be made a bit more precise, though still simple, by presenting the relationship in tabular or graphical form.
