—This paper attempts to explain why an inverted yield curve may be a leading indicator of recession. It develops a modified version of the extended IS-LM model with the term structure of interest rates and provides a phase-diagram analysis to illustrate how an adverse shock may result in an inverted yield curve as well as a subsequent recession. It demonstrates that the occurrence of inverted yield curve is an off-equilibrium phenomenon after an adverse shock in the adjustment process of interest rate and output, and that an inverted yield curve may lead, but does not lead to, a recession.
—Inverted yield curve, IS-LM model, recession, term structure of interest rate.
X. Henry Wang is a professor at the Department of Economics, University of Missouri-Columbia, Columbia, MO 65211 USA (e-mail: WangX@missouri.edu).
Bill Z. Yang is an associate professor at the School of Economic Development, Georgia Southern University, Statesboro, GA 30460 USA. (912-478-5727; Fax: 912-478-0710; e-mail: billyang@georgiasouthern. edu).
Berk  gave an excellent survey on this issue, and Estella  provided an informal summary in the form of FAQ’s, including an extensive bibliography
Berk  gave an excellent survey on this issue, and Estella  provided an informal summary in the form of FAQ’s, including an extensive bibliography.
Cite:X. Henry Wang and Bill Z. Yang, "Inverted Yield Curves and the Incidence of Recession: A Graphical Presentation," International Journal of Trade, Economics and Finance vol.2, no.1, pp. 67-71, 2011.