Yield spread as a leading indicator of Tunisian industrial production
Keywords:
yield spread, in-sample forecasting, out-of-sample forecasting, economic growth, recessions, leading indicator, predictive content, linear regression, probit modelAbstract
Can the yield spread, which has been found to predict with surprising accuracy the movement of key macroeconomic variables of developed countries, also predict such variables for an emerging country. This paper is an attempt to answer empirically this question for the Tunisian economy. It also examines international financial linkages and how the euro area yield curve helps to predict domestic macro financial variables. Although the phenomenon has been widely examined in developed market economies, similar studies are virtually absent in the case of emerging economies. In part, this is because in developing economies with administrated interest rates, the yield curve has been either completely absent or not market determined and thus did not form a suitable test case. In the Tunisian financial market, there has been considerable improvement in terms of volumes, variety of instruments, numbers of participants and dissemination of information, and a yield curve particularly in case of government securities started emerging since 2000.
In our study, two approaches are implemented. The first one, widely used, consists in regressing the growth rate of the coincident indicator on the leading indicator. In the second one, we examine the usefulness of the yield spread in predicting whether or not the economy will be in recession in the future. So, in that particular case we use a Probit model. For both approaches we use the in-sample forecasting ability as well as the out-of-sample accuracy of the outcomes.
The results are somewhat tentative but consistent with the similar studies conducted in case of other countries. Findings of the study provide evidence that the yield curve could be considered as a leading indicator of real growth or recessions in Tunisian context, and consequently may be useful for both to private investors and to policy makes for forecasting purposes and, perhaps more importantly to understand the ongoing process of international financial integration.
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