Changes in the informational content of term spreads: Is monetary policy becoming less effective?

We examine the predictive power of term spreads as predictors of economic recessions in Europe and the US. Using a battery of methodologies that include endogenous changepoint detection we find that the predictive power of spread-type variables has changed significantly during the 1980s and 1990s: in the most advanced countries the domestic spread has lost its informative content in favor of international – US and German – spreads, whereas in less developed countries this informational content has appeared during the late 1980s. Given the theoretical arguments for the predictive power, these findings suggest that domestic monetary policy may have become less effective in the most developed countries of the sample.