Indicator Properties of the Paper-Bill Spread: Lessons from Recent Experiences

Benjamin M. Friedman and Kenneth Kuttner ()

No 4969, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 1994-12
Note: ME
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published as Review of Economics and Statistics, Vol. 80 (February 1998): 34-44.

Downloads: (external link)
http://www.nber.org/papers/w4969.pdf (application/pdf)

Related works:
Journal Article: Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience (1998)
Working Paper: Indicator properties of the paper-bill spread: lessons from recent experience (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4969

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4969

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().