Honors Theses and Capstones

Date of Award

Fall 2014

Project Type

Senior Honors Thesis

College or School

PAUL

Department

Economics

Program or Major

Economics

Degree Name

Bachelor of Arts

First Advisor

Evangelos Simos

Abstract

With the increasing demand for a better understanding about the relationship between yield curve and economic activities, this paper analyzes the data sets of seven countries in the European Union: Germany, France, Belgium, Spain, the United Kingdom, Sweden and Poland using quantitative analytical method. Based on previous literature, the expected hypothesis is: there is a strong relationship between the yield curve and the chance of an incoming economic contraction. The inverted yield curve, or the negative yield curve spread is considered as the tool to forecast the incoming contraction. Having been used as a rule of thumb for future reference of a contraction, whether yield curve and interest rates can be an accurate tool to predict the movement of business cycles should be studied more thoroughly, which will help not only the governments to reduce the loss from recession, but also equip financial sector valuable information to adjust itself before a contraction takes place. Further findings in this paper present a comparison between a group of Eurozone members and a group of non-Eurozone members. The similarities and differences give a broad idea of how the creation of the Eurozone has affected the area in the last decade.

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