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The yield curve as a predictor and emerging economies

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  • Mehl, Arnaud

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 the euro area yield curves help to predict. It finds that the domestic yield curve in emerging economies has in-sample information content even after controlling 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 the euro area yield curves also have in- and out-of-sample information content for future inflation and growth in emerging economies. In particular, for emerging economies that have an exchange rate peg to the US dollar, the US yield curve is often found to be a better predictor than these economies’ own domestic curve 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 from the low end of the yield curve. JEL Classification: E44, F3, C5

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0691.

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Date of creation: Nov 2006
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Handle: RePEc:ecb:ecbwps:20060691

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Keywords: emerging economies; forecasting; international linkages; yield curve;

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Cited by:
  1. 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.
  2. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," Working Paper Series 0691, European Central Bank.
  3. 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.
  4. Szymon Grabowski, 2007. "Real economic activity and state of financial markets," Working Papers 7, Department of Applied Econometrics, Warsaw School of Economics.
  5. 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.
  6. Grabowski, Szymon, 2008. "What does a financial system say about future economic growth?," MPRA Paper 11560, University Library of Munich, Germany.
  7. 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.
  8. 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.

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