• ISSN: 2010-023X
    • Frequency: Bimonthly
    • DOI: 10.18178/IJTEF
    • Editor-in-Chief: Prof.Tung-Zong (Donald) Chang
    • Executive Editor: Ms. Cherry L. Chen
    • Abstracting/ Indexing: Engineering & Technology Digital Library, ProQuest, Crossref, Electronic Journals Library , EBSCO, and Ulrich's Periodicals Directory
    • E-mail: ijtef@ejournal.net
IJTEF 2011 Vol.2(1): 67-71 ISSN: 2010-023X
DOI: 10.7763/IJTEF.2011.V2.80

Inverted Yield Curves and the Incidence of Recession: A Graphical Presentation

X. Henry Wang and Bill Z. Yang
Abstract—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.

Index Terms—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 [3] gave an excellent survey on this issue, and Estella [5] provided an informal summary in the form of FAQ’s, including an extensive bibliography
Berk [3] gave an excellent survey on this issue, and Estella [5] provided an informal summary in the form of FAQ’s, including an extensive bibliography.

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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.

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