Forecasting macroeconomic variables through the term structure of interest rates in Portugal

During the second half of the 20th century, researchers started to notice that the slope of the yield curve could predict the evolution of the economic activity of a country, especially the US, in the near future. This included the prediction of recession periods after a big decrease or even an inversion of the yield curve, which was measured by the term spread of interest rates, i.e. the difference between the long-term and short-term interest rates. This study, whose focus is the analyses of this relationship between the term spread and the Portuguese GDP growth, found a significant relation between the GDP growth with the values of the term spread of the 1st, 7th and 8th trimesters prior to it. But, while performing the out of sample testing, the results obtained were extremely poor, especially considering the r-squared of the estimated values between the end of 2005 and 2008 with the information available in 2005 was lower than zero, which means that an horizontal line describes better the actual data than the model. Besides that, while analysing the effects on the Portuguese recessions, it is visible a drop before the 2002 crisis, a negative term spread at the beginning of the subprime crisis and an abrupt stop of a steep increase of the term spread before the debt crisis.