The Yield Curve as a Predictor of Business Cycle

Abstract

In the Master Thesis, we study the yield curve's predictability power for the business cycle in developing countries. For this research, we want to answer the question if the inverted yield curve can predict the recessions for emerging markets. We consider four countries: Greece, India, South Africa, and Ukraine. Based on the analysis of previous researches, we identify the advantages of different modelling and forecasting tools. We find that the interest rate spread is statistically significant for recession prediction based on OLS and probit modelling for mentioned above countries. The out-of-sample forecasting works better than in-sample for Greece and India, for Ukraine and Greece such performance is weaker. We conclude that the yield curve has partial power in predicting a recession in developing countries.