Advanced Study on Yield Curve as a Leading Indicator in Predicting Economic Slowdowns: An Evidence from India
The relationship between the yield curve, economic activity, and monetary policy has been studied in the past. While empirical work has been done to demonstrate the importance of the yield curve’s slope in forecasting economic slowdowns, it has primarily been for developed markets such as the United States, Europe, and Japan. Using wavelet-based filtering, this paper investigates the predictive strength of the yield curve slope in forecasting economic slowdowns in India. We propose a new method based on period models for constructing real-time recession probabilities forecasts. Our research indicates that the yield curve has a major effect on forecasting economic slowdowns in India. Monetary policy has a direct effect on the yield curve, which serves as a leading indicator in forecasting macroeconomic behaviour over longer time horizons, with the greatest impact seen over periods of 8 to 16 quarters (2 to 4 years).
Author (s) Details
Visiting Faculty, NMIMS School of Economics, Mumbai, India.
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