PREDICTING INTERWAR BUSINESS CYCLES WITH THE INTEREST RATE YIELD SPREAD

Recent studies have demonstrated the ability of the interest rate yield spread to predict post-war business cycles. This same methodology is applied to the prediction of interwar business cycles in the United States and the United Kingdom. The spread predicts the early interwar cycles, although the lag in the United States is variable. The spread fails to provide a prediction of the 1937-1938 recession and the length of the depression in either country. Neither spread improves the recession forecast for the other country.