Why does the yield curve predict GDP growth? The role of banks

Arbeitspapier

We provide evidence on the effect of the slope of the yield curve on economic activity through bank lending. Using detailed data on banks' lending activities coupled with term premium shocks identified using high-frequency event study or instrumental variables, we show that a steeper yield curve associated with higher term premiums (rather than higher expected short rates) boosts bank profits and the supply of bank loans. Intuitively, a higher term premium represents greater expected profits on maturity transformation, which is at the core of banks' business model, and therefore incentivizes bank lending. This effect is stronger for ex-ante more leveraged banks. We rationalize our findings in a portfolio model for banks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2023-14

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy ; Central Banks and Their Policies
• Subject: predictive power of the yield curve ; term spread ; term premium ; bank lending ; bank probability ; event study ; instrumental variable

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Minoiu, Camelia ; Schneider, Andrés ; Wei, Min
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Atlanta
• (where): Atlanta, GA
• (when): 2023

Further information

• DOI: doi:10.29338/wp2023-14
• Handle: http://hdl.handle.net/10419/279469
• Last update: 10.03.2025, 11:43 AM CET