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Do Domestic Yield Curves in Emerging Market Economies Prove to be Useful in Forecasting Future Economic Growth?
(University of the Witwatersrand, Johannesburg, 2022) Gosai, Rushai; Britten, James
Much has been said and researched about the term spreads ability to forecast the path of Gross Domestic Product (GDP) in developed economies. The relationship holds that should the yield spread turn negative that this indicates that future GDP will retract and that a recession is eminent. At the back end of 2019, the subject found prominence again as the yield spread measured by the ten year government bond and the three month Treasury Bill (Tbill) turned negative. The Federal Reserve Bank of America (The Fed) lowered interest rates in the hope that lower borrowing costs would stimulate the economy and lead to an increase in aggregate demand. It then follows, could the domestic yield curve spread perhaps be suitable in forecasting domestic Emerging Market (EM) GDP growth? This research highlights the EM experience whilst still testing the ability of the yield curve in the US to predict future economic growth. The framework based on the work of Bosner-Neal and Morley (1997), found over the horizon of 1980 to 2020, for the EM countries of Brazil, Russia, India, China and South Africa (BRICS) unsupportive evidence that the domestic yield curve spread is a suitable indicator to forecast future GDP growth.