The Predictive Power of the Yield Curve

The yield curve has long been a subject of interest to macroeconomists and financial economists since the term structure of interest rates carries important information about expectations, monetary policy and market risk factors. As expectation hypothesis suggest; it is possible to extract expectations of economic actors about future economic activity by torturing the term structure of interest rates. Recent economic and financial crisis has manifested the importance of the indicators that correctly predict the future path of economy, and hence has increased the value of studies on the yield curve. In this study, we provide a literature survey of predictive power of the yield curve on inflation and reel economic activity and, of policy effects on the predictive power of the yield curve. We also investigate whether the yield spreads and reel economic activity has long-run relationship in Turkey. Economists, policymakers and market analyst who wish to investigate whether the term structure of interest rates contains significant information about the future economic activity can utilize this study.