BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 18/2006:
The yield curve as a predictor and emerging economies
Arnaud Mehl ()
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.
Keywords: emerging economies; yield curve; forecasting; international linkages; (follow links to similar papers)
JEL-Codes: C50; E44; F30; (follow links to similar papers)
61 pages, December 20, 2006
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