Abstract
This paper examines whether the spread between long- and short-terminterest rates contains information about future economic activity in India. Using the yields on securities with maturities ranging from three months to ten years, we construct five different yield spreads at shorter end, longer end, and policy relevant area of the yield curve. We study the predictive power of each of these spreads for output growth within aggregate and time scale framework using wavelet methodology. We find that predictive power holds only at lower frequencies for the spreads which are constructed at shorter end and policy relevant areas of yield curve. However, spreads which are constructed at the longer end of the yield curve do not seem to have predictive information for output growth.
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Notes
Since time and frequency are inversely related, higher time scales represent lower frequencies of time series and vice-versa.
For constructing the spreads at different areas of yield curve, we followed Tkacz (2004).
Since \(\mathrm{A}_{4}\) components represent the non-stationary component of the time series, in our regression analysis, they were not tested for predictive power.
Sp (1, 3) refers to the yield spread constructed at the shorter end of yield curve. Sp (5, 3) and Sp (10, 3) refer to yield spreads constructed at the policy relevant area of yield curve Sp (10, 5), and Sp (10, 8) represent the yield spreads constructed at the longer end of yield curve.
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Dar, A.B., Samantaraya, A. & Shah, F.A. The predictive power of yield spread: evidence from wavelet analysis. Empir Econ 46, 887–901 (2014). https://doi.org/10.1007/s00181-013-0705-6
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DOI: https://doi.org/10.1007/s00181-013-0705-6