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The Yield Curve as a Predictor and Emerging Economies

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  • Arnaud Mehl

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Abstract

This paper investigates the extent to which the slope of the yield curve in emerging economies predicts domestic inflation and growth. It also examines international financial linkages and how the US and euro area yield curves help to predict. It finds that the domes-tic yield curve in emerging economies contains in-sample information even after control-ling for inflation and growth persistence, at both short and long forecast horizons, and that it often improves out-of-sample forecasting performance. Differences across countries are seemingly linked to market liquidity. The paper further finds that the US and euro area yield curves also contain in- and out-of-sample information for future inflation and growth in emerging economies. In particular, for emerging economies with exchange rates pegged to the US dollar, the US yield curve is often found to be a better predictor than the domes-tic curves and to causally explain their movements. This suggests that monetary policy changes and short-term interest rate pass-through are key drivers of international financial linkages through movements at the low end of the yield curve.

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File URL: http://hdl.handle.net/10.1007/s11079-007-9077-x
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 20 (2009)
Issue (Month): 5 (November)
Pages: 683-716

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Handle: RePEc:kap:openec:v:20:y:2009:i:5:p:683-716

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Emerging economies; Yield curve; International financial linkages; E44; F3; C5;

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Citations

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Cited by:
  1. Szymon Grabowski, 2007. "Real economic activity and state of financial markets," Working Papers 7, Department of Applied Econometrics, Warsaw School of Economics.
  2. Abdul Majid, Muhamed Zulkhibri, 2011. "Predicting Output and Inflation in Less Developed Financial Markets Using the Yield Curve: Evidence from Malaysia," MPRA Paper 29039, University Library of Munich, Germany.
  3. Vilimir Yordanov, 2012. "The Bulgarian Foreign and Domestic Debt – A No-Arbitrage Macrofinancial View," William Davidson Institute Working Papers Series wp1032, William Davidson Institute at the University of Michigan.
  4. Mario Reyna Cerecero & Diana Salazar Cavazos & Héctor Salgado Banda, 2008. "The Yield Curve and its Relation with Economic Activity: The Mexican Case," Working Papers 2008-15, Banco de México.
  5. Boril Šopov & Jakub Seidler, 2011. "Yield Curve Dynamics - Regional Common Factor Model," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 140-156.
  6. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," BOFIT Discussion Papers 18/2006, Bank of Finland, Institute for Economies in Transition.
  7. Fernandez-Perez, Adrian & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2014. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 21-33.
  8. Grabowski, Szymon, 2008. "What does a financial system say about future economic growth?," MPRA Paper 11560, University Library of Munich, Germany.

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