Predicting Inflation and Output in Pakistan: The Role of Yield Spread

Fida Hussain () and Asif Mahmood
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Fida Hussain: State Bank of Pakistan

No 93, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper presents the empirical evidences on the predictability of yield spread, particularly with respect to inflation and output growth in Pakistan. To our knowledge, this study is the first of its kind in case of Pakistan. We also test the role of foreign interest rates such as of the US in influencing the domestic interest rates in Pakistan and their contribution towards predicting inflation and output growth as well. Our results indicate that the yield spread in Pakistan do contain information about future changes in output growth but not for inflation. Both in-sample and out-of-sample forecasts for output growth show that the predictive content span from 6 to 24 months in future across the yield spreads. Use of the US yield spread further increases the predictability of domestic yield spread for output growth. In case of inflation, the results are found to be insignificant across different horizons and measures of yield spreads.

Keywords: Yield curve; inflation; Output; Forecasting (search for similar items in EconPapers)
JEL-codes: C53 E31 E43 O47 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2017-10
New Economics Papers: this item is included in nep-for and nep-mac
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Citations: View citations in EconPapers (1)

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