Can the Yield Curve Predict Economic Growth Performance? Empirical Evidence from Nigeria

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