What is a structural fall in the term premium

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Reference no: EM131305387

The following excerpt from an article in the Wall Street Journal describes Federal Reserve Chairman Ben Bernanke's interpretation of the yield curve in 2006: Fed Chairman Ben Bernanke . . . believes the yield curve isn't as good a recession predictor as it once was. "I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come," he said early last year.

In the past, when the yield curve was inverted, short-term rates were "quite high," but now, they aren't. Second, the flattening could result from a structural fall in the "term premium," that is the additional return investors require for holding long as opposed to short-term debt securities.

a. With regard to the usefulness of using the yield curve to predict recessions, why would it matter that in the past when the yield curve was inverted, short-term rates were "quite high," while in the period Bernanke was discussing, when the yield curve was flat or inverted, short-term rates were relatively low?

b. What is a "structural fall in the ‘term premium'"? How would such a structural fall be relevant to using the yield curve to predict recessions?

c. Was Bernanke's interpretation of the yield curve correct?

Reference no: EM131305387

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