Forecasting macroeconomic variables through the term-structure of interest rates in emerging countries: how did the Great Recession affect the term spread predictive power across the globe?

This report studies the predictive power of the empirical slope of the structure of interest rates, that is the difference between 10-years and 3-months bonds, when forecasting macroeconomic variables in emerging countries, and tries thus to answer “Forecasting macroeconomic variables through the term-structure of interest rates in emerging countries: how did the Great Recession affect the term spread predictive power across the globe?” Indeed, the literature having not been able to settle on a consensus, still describing the term spread as a “stylized fact”, besides focusing mostly on the United Stated and members of the European Union, this paper tries to fill in the gap by comparing multiple emerging countries (11) forecast performances for month-over-month unemployment growth rate, inflation growth rate and the industrial production growth rate. Moreover, the period selected, from 2000-2005 to 2016-2018, should result in structural breaks which in turn should improve the said predictive ability, as suggested by Wheelock and Wohar (2009, p.430) in their survey of past results, highlighting the loss of it ever since the mid-1980s and an increased stability in macroeconomic factors. However, if this paper finds evidence of differences across countries, even across regions (as underlined by Asian countries results when considering the inflation growth), but also evidence supporting the “intertemporal consumption theories” (through the unemployment rate for which Russia only, due to its economical and political system differing from the others, appears to bear some significativity, at least in-sample), or even of the importance of the monetary regime (strict control of inflation worsening performances as illustrated by the Russian and South African cases pseudo out-of-sample), it was unable to confirm the thesis. Indeed, as demonstrated by South Africa, for which data were voluntary chosen to start in 1981 instead of after the beginning of the second millennium, the structural break of the mid-1980s, reflecting new monetary policy stance, still proves itself to be more significant, highlighting only the little evidence supporting the idea of improvement in predictive power of the term spread following the Great Recession.