Global Insights Into Term Spreads: Unveiling Their Predictive Power During Unconventional Monetary Policy

ABSTRACT This study investigates the predictive power of the term spread for forecasting economic activity across both conventional and unconventional monetary policy regimes. Utilizing data from 22 OECD countries spanning the period from 1985Q1 to 2024Q2, the analysis reveals that the term spread generally maintains its ability to predict GDP growth during periods of conventional monetary policy. Conversely, under unconventional monetary policy conditions, characterized by central bank policy rates anchored at the zero lower bound, the predictive power of the term spread diminishes substantially, remaining statistically significant in only a limited subset of countries. By contrast, stock returns emerge as a more robust explanatory variable for GDP growth across a broader set of economies under these conditions. These findings suggest that the term spread—historically regarded as one of the most reliable predictors of future economic activity since the late 1980s—may no longer serve as the most effective forecasting tool amid evolving monetary policy frameworks.