Abstract
The paper investigates the capability of the yield curve to predict future economic activity in Nigeria, especially before, during and after the 2016/2017 economic recession. Using quarterly data on the index of industrial production (as a proxy for economic growth) and yield spread, we generated regression results for various data samples including the era of the global financial crisis- GFC (2007-2009); pre-economic recession in Nigeria (2010-2015) and economic recession / slow recovery (2016-2019).Though the model behaved differently before, during and after the 2016/2017 economic recession, general results indicated the substantial predictive power of the yield spread in providing a good forecast of the level of economic activity up to four quarters into the future. The paper therefore, strongly demonstrated the influence of yield spreads in predicting the future level of Nigeria’s economic activity. Keywords: Yield curve, economic growth, recession, forecast, Nigeria. DOI: 10.7176/RJFA/12-10-05 Publication date: May 31 st 2021
Highlights
The yield curve which plots bond yield against its time to maturity has been adjudged by several researchers as a reliable predictor of economic performance
5.1 Graphical Relationship between indicators of economic activity and yield spread First, we examined the graphical relationship between the variables of interest
Both graphs generally suggested that a decline in economic activity is preceded by a decrease in the yield spread and narrowing yield spread often signals a decrease in the level of economic growth
Summary
The yield curve which plots bond yield against its time to maturity has been adjudged by several researchers as a reliable predictor of economic performance. An upward sloping or positive yield curve indicates an increase in economic activity, inflation rate and short-term interest rates. The information content of the yield curve in predicting real economic activity began to attract significant attention in the literature in the 1980s. Estrella and Hardouvelis, (1991) showed that the yield curve could be employed to provide useful information on the probability of US economy to experience recession (Mohapi and Botha, 2013). Apart from the US, it has been shown that the yield curve could predict recession in other countries such as Germany, France, Italy and the United Kingdom (Estrella and Mishkin, 1995)
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