I am trying to better understand the mechanism (if there is one) behind an inverted yield curve predicting - or causing, as some would argue - a recession. In order to do that, I'm trying to understand why an inverted yield curve has historically NOT been a good predictor in countries other than the US.
See e.g. this article by AQR, which discusses the track record of yield curve inversions in Australia, Japan and Germany. The authors qualitatively argue why that track record hasn't been great but don't provide much of a general framework to think about it. I suspect that they are on to something in the case of Japan: "It is possible to argue that the banking system in Japan is so broken that it doesn’t matter how steep the yield curve is, banks won’t lend anyway. But, more likely, the relationship has broken down because interest rates have been stuck at or near zero for so long. The yield curve can no longer tell you whether the Bank of Japan has raised rates too much or not, because it hasn’t raised rates at all." I agree that the banking system looks pretty zombified, which would explain why banks (and the economy in general) don't really react to cues from interest rates. In addition, the Bank of Japan has such an outsize weight in the market for government bonds these days that the true information content of interest rates is probably quite low. However, I don't think either of these characterizations would apply to Australia, so clearly a broader line of thinking is necessary.
Academic references and/or plain English welcome. Thanks.