Indicator Properties of the Paper-Bill Spread: Lessons from Recent Experiences / Benjamin M. Friedman, Kenneth N. Kuttner.

Format:

Book

Author/Creator:

Friedman, Benjamin M.

Contributor:

National Bureau of Economic Research.

Kuttner, Kenneth N.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4969.

NBER working paper series no. w4969

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Indicator Properties of the Paper-Bill Spread

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

A feature of U.S. post-war business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and Treasury bills to widen shortly before the onset of recessions. By contrast, the paper- bill spread did not anticipate the 1990-91 recession. Empirical work presented in this paper supports two (not mutually exclusive) explanations for this departure from past experience. First, at least part of the paper-bill spread's predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy, but the 1990-91 recession was unusual in post-war U.S. experience in not being immediately precipitated by tight monetary policy. Second, movements of the spread during the few years just prior to the 1990-91 recession were strongly influenced by changes in the relative quantities of commercial paper, bank CDs and Treasury bills that occurred for reasons unrelated to the business cycle. This latter finding in particular sheds light on the important role of imperfect substitutability of different short-term debt instruments in investors portfolios, and highlights the burdens associated with using relative interest rate relationships as business cycle indicators.

Notes:

Print version record

December 1994.