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Exercise 7 - Mishkin

Exercise 7 - Mishkin - economic activity rather at forecast...

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ECON 423, Exercise 7 Discussion Questions on “Yield Curve as a Predictor of U.S. recessions”. 1. How, according to Estrella and Mishkin, does the slope of the Treasury Yield curve predict future economic activity? Steepness should be an indicator of possible future recession i. What is the likely effect of low short term interest rates on future economic activity? Decline in short term interest rates steepens the yield curve and increases real growth ii. What does the slope imply about expected future inflation and what is the relationship between expected inflation and economic activity? Inflation positively related to economic activity 2. Estrella and Mishkin state that their study differs from earlier studies in two aspects. What are the two aspects? 1. don’t look at the ability of yield curve spread to make quantitative measures of future
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Unformatted text preview: economic activity, rather at forecast of recessions 3. How, according to Estrella and Mishkin, do the four variables considered in their study perform in forecasting recessions? In the short term other 3 (New York Stock Exchange (NYSE) stock price index, the Commerce Department’s index of lead- ing economic indicators, and the Stock-Watson index) are better at predicting recession, while in long term (4 quarters ahead) yield curve is not flat, while other 3 indicators are. 4. What are the two reasons given by Estrella and Mishkin to explain why the Yield curve might have provided a weaker signal of the 1990-91 recession? 1. restrictive monetary policy 2. variation in yield curve was small...
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