Forecasting output growth using a DSGE-based decomposition of the South African yield curve

Rangan Gupta, Hylton Hollander and Max Steinbach

Empirical Economics, 2020, vol. 58, issue 1, No 14, 378 pages

Abstract: Abstract Evidence in favour of the ability of the term spread to forecast economic growth of the South African economy is non-existent. This could be due to the term spread aggregating information contained in the expected spread and the term premium. To decompose the term spread into its subcomponents, we develop an estimable small open economy new Keynesian dynamic stochastic general equilibrium (SOENKDSGE) model of the inflation targeting South African economy. The SOENKDSGE model is estimated with Bayesian methods over the quarterly period of 2000:01–2014:04. We then use a linear predictive regression framework to analyse the out-of-sample forecasting ability of the aggregate term spread, as well as the expected spread and term premium. Our forecasting results fail to detect forecasting gains from the aggregate term spread and also the term premium, but the expected spread is found to contain important information in forecasting output growth over short- to medium-run horizons, over the period of 2004:01–2014:04, using an in-sample period of 2000:01–2003:04. The results therefore highlight the importance of the forward-looking component of the term spread—the expected spread—in forecasting the output growth of South Africa.

Keywords: Structural decomposition; Term spread; DSGE; Predictive regression framework; Forecasting output growth; South Africa (search for similar items in EconPapers)
JEL-codes: C22 C53 E32 E43 E47 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Working Paper: Forecasting Output Growth using a DSGE-Based Decomposition of the South African Yield Curve (2015)
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DOI: 10.1007/s00181-018-1607-4

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