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Predicting Inflation and Output in Pakistan: The Role of Yield Spread

Author

Listed:
  • Fida Hussain

    (State Bank of Pakistan)

  • Asif Mahmood

    (State Bank of Pakistan)

Abstract

This paper presents the empirical evidences on the predictability of yield spread, particularly with respect to inflation and output growth in Pakistan. To our knowledge, this study is the first of its kind in case of Pakistan. We also test the role of foreign interest rates such as of the US in influencing the domestic interest rates in Pakistan and their contribution towards predicting inflation and output growth as well. Our results indicate that the yield spread in Pakistan do contain information about future changes in output growth but not for inflation. Both in-sample and out-of-sample forecasts for output growth show that the predictive content span from 6 to 24 months in future across the yield spreads. Use of the US yield spread further increases the predictability of domestic yield spread for output growth. In case of inflation, the results are found to be insignificant across different horizons and measures of yield spreads.

Suggested Citation

  • Fida Hussain & Asif Mahmood, 2017. "Predicting Inflation and Output in Pakistan: The Role of Yield Spread," SBP Working Paper Series 93, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:93
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    File URL: http://www.sbp.org.pk/publications/wpapers/2017/wp93.pdf
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    More about this item

    Keywords

    Yield curve; inflation; Output; Forecasting;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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