<![CDATA[Introduction/Main Objectives: This research examines the predictive power and stability of yield spread in relation to recession for five Asia-Pacific Countries, with monetary policy as the control variable. Background Problems: Yield spread has been extensively studied in industrial countries, but its impact on the real economy in developing regions remains underexplored. Moreover, the informational content underlying the yield spread is still unclear. Novelty: This research incorporates the role of monetary policy objectives in influencing the informational content and stability of the predictive power of yield spread. Research Methods: The research utilizes a fixed effects panel probit approach to conduct in-sample forecasting using monthly secondary data from October 2004 to May 2022. To test parameter stability, Likelihood Ratio Tests were also used. Findings/Results: The yield spread outperforms money supply and stock index for predicting recessions, with an optimal lag of three months. Monetary policy plays a crucial role as every inversion of the yield curve is associated with an interest rate hike, but the model performs better when central bank have prioritized output stabilization and the relationship between interest rate and output is not disturbed. Conclusion: Yield spread is a reliable predictor of recession in Asia-Pacific, but its predictive power depends on the interest rate–output relationship. Therefore, central banks shouldn't use the yield spread during zero lower bound or supply shock conditions.]]>
