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Predicting Output and Inflation in Less Developed Financial Markets Using the Yield Curve: Evidence from Malaysia

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  • Abdul Majid, Muhamed Zulkhibri

Abstract

This paper investigates the role of the term spread to predict domestic output and inflation in less developed financial market with the focus on Malaysia bond market. By controlling for past values of the dependent variable, this paper finds that the term spread of various bond maturities contain relevant information about future output and inflation at short horizons. Besides that, we employ a probit model to assess the ability for the yield curve to predict future economic slowdown. The results suggest that the term spread has contributed significantly in the probability of predicting future economic slowdown. Despite the under-developed bond market, the findings point to the potential for bond yields to play a greater role in monetary analysis beyond conventional indicators. From the policy point of views, the results from our analysis suggest that there is a significant potential for incorporating more technical and model based approaches using the yield curve beyond the usual indicator analysis.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:29039
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    File URL: https://mpra.ub.uni-muenchen.de/29039/1/MPRA_paper_29039.pdf
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    References listed on IDEAS

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    5. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    6. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 1993/019, International Monetary Fund.
    7. Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.
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    Cited by:

    1. Fabian Lipinsky & Li Lian Ong, 2014. "Asia’s Stock Markets; Are There Crouching Tigers and Hidden Dragons?," IMF Working Papers 2014/037, International Monetary Fund.

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    More about this item

    Keywords

    Term spread; Forecasting; Monetary Policy; Malaysia;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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