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A Note on the (Continued) Ability of the Yield Curve to Forecast Economic Downturns in South Africa

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  • Ferdi Botha
  • Gavin Keeton

Abstract

In 2002-2003, the South African yield spread falsely signalled a downswing that never materialised. This paper provides two reasons for this false signal. First, while the Reserve Bank never actually officially declared the start of a downswing, by alternative measures a downswing did actually occur. It is this severe weakness in economic activity at that time that the yield curve pointed to. Second, short-term interest rates in 2003 were higher than they should have been because of a mistake made in measuring consumer price inflation. Because South Africa had recently introduced an inflation-targeting regime, policy interest rates were, as a result of this error, kept too high for too long. This policy mistake was rectified as soon as the error in the Consumer Price Index was discovered. Thus, the yield curve in 2003 pointed to the reality that short-term interest rates were too high and risked pushing the economy into full blown recession. This is demonstrated by the fact that it was a fall in long bond interest rates that caused the yield spread to turn negative, indicating expectations that short-term interest rates would need to be cut – as indeed they were.

Suggested Citation

  • Ferdi Botha & Gavin Keeton, 2014. "A Note on the (Continued) Ability of the Yield Curve to Forecast Economic Downturns in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 82(3), pages 468-473, September.
  • Handle: RePEc:bla:sajeco:v:82:y:2014:i:3:p:468-473
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    File URL: http://hdl.handle.net/10.1111/saje.12053
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    References listed on IDEAS

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    Cited by:

    1. Laurence Harris & Manqoba Ntshakala, 2018. "The information content of the yield spread about future inflation in South Africa," WIDER Working Paper Series 63, World Institute for Development Economic Research (UNU-WIDER).
    2. Johannes W. Fedderke, 2020. "Is the Phillips curve framework still useful for understanding inflation dynamics in South Africa," Working Papers 10142, South African Reserve Bank.
    3. Johannes W. Fedderke, 2021. "The South African–United States sovereign bond spread and its association with macroeconomic fundamentals," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 499-525, December.
    4. Goodness C. Aye & Christina Christou & Luis A. Gil‐Alana & Rangan Gupta, 2019. "Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty," Journal of International Development, John Wiley & Sons, Ltd., vol. 31(1), pages 101-116, January.
    5. Joseph G. Haubrich, 2021. "Does the Yield Curve Predict Output?," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 341-362, November.
    6. Manqoba Ntshakala & Laurence Harris, 2018. "The information content of the yield spread about future inflation in South Africa," WIDER Working Paper Series wp-2018-63, World Institute for Development Economic Research (UNU-WIDER).

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