Testing for asymmetry in the link between the yield spread and output in the G-7 countries

The difference in yields between long-term and short-term securities has be en used both as a business cycle leading indicator and as an indicator of t he direction of monetary policy. This paper tests for an asymmetry, in the form of a threshold effect, such that the impact of the yield spread on the conditional expectation of output growth is greater on one side of the thr eshold than on the other. We test using data from the G-7 countries, and fi nd that, while the yield spread does generally show a significant link with output, only in the United States and Canada is there strong evidence of a n asymmetry of this type. This evidence suggests a high value of the thresh old in both the United States and Canada. (C) 2000 Elsevier Science Ltd. Al l rights reserved. JEL classification: E52.