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The yield curve as a predictor and emerging economies

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Author Info
Mehl, Arnaud () (BOFIT)

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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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Publisher Info
Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 18/2006.

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Length: 61 pages
Date of creation: 20 Dec 2006
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Handle: RePEc:hhs:bofitp:2006_018

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Keywords: emerging economies yield curve forecasting international linkages

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Find related papers by JEL classification:
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F30 - International Economics - - International Finance - - - General

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  1. 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. [Downloadable!]
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