Yield spreads and real economic activity in East European transition economies

Stephanos Papadamou

Applied Economics Letters, 2009, vol. 16, issue 5, 531-537

Abstract: Recent research in developed countries provides evidence for the significant role of the yield spread on real economic activity. Using k-months industrial production growth rate model, this article attempts to ascertain whether similar results are obtained for countries from East Europe (Czech Republic, Poland, Hungary and Slovakia). The results suggest that the interest rate spread does indeed have some predictive power over the 24-months across the countries. These results remain qualitative robust to the inclusion of additional variables and to the change of unemployment rate as a different measure of economic activity. Cyclical movements of volatility appear to be unable to account for the usefulness of the spread for forecasting industrial production growth. Finally, it is found that the term spread is a better indicator of future real growth in countries with low and stable inflation (Czech Republic) and not in countries characterized by high and volatile inflation (Hungary).

Date: 2009
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DOI: 10.1080/13504850601032123

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