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Empirical Economics

, Volume 58, Issue 1, pp 351–378 | Cite as

Forecasting output growth using a DSGE-based decomposition of the South African yield curve

  • Rangan GuptaEmail author
  • Hylton Hollander
  • Rudi Steinbach
Article

Abstract

Evidence in favour of the ability of the term spread to forecast economic growth of the South African economy is non-existent. This could be due to the term spread aggregating information contained in the expected spread and the term premium. To decompose the term spread into its subcomponents, we develop an estimable small open economy new Keynesian dynamic stochastic general equilibrium (SOENKDSGE) model of the inflation targeting South African economy. The SOENKDSGE model is estimated with Bayesian methods over the quarterly period of 2000:01–2014:04. We then use a linear predictive regression framework to analyse the out-of-sample forecasting ability of the aggregate term spread, as well as the expected spread and term premium. Our forecasting results fail to detect forecasting gains from the aggregate term spread and also the term premium, but the expected spread is found to contain important information in forecasting output growth over short- to medium-run horizons, over the period of 2004:01–2014:04, using an in-sample period of 2000:01–2003:04. The results therefore highlight the importance of the forward-looking component of the term spread—the expected spread—in forecasting the output growth of South Africa.

Keywords

Structural decomposition Term spread DSGE Predictive regression framework Forecasting output growth South Africa 

JEL Classification

C22 C53 E32 E43 E47 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  • Rangan Gupta
    • 1
    Email author
  • Hylton Hollander
    • 2
  • Rudi Steinbach
    • 3
  1. 1.Department of EconomicsUniversity of PretoriaPretoriaSouth Africa
  2. 2.African Institute of Financial Markets and Risk Management, Faculty of CommerceUniversity of Cape TownRondeboschSouth Africa
  3. 3.Research DepartmentSouth African Reserve BankPretoriaSouth Africa

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