The Yield Curve as a Predictor of Gross Domestic Product Growth in Nordic Countries

AbstractThe yield curve – specifically the spread between long term and short term interest rates is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead. This paper aims to analyse the dependence between slope of the yield curve and an economic activity of selected countries between the years 2000 and 2013. The slope of the yield curve can be measured as the yield spread between sovereign 10-year and 3-month bonds. The natural and probably the most popular measure of economic growth is by GDP growth, taken quarterly. The results showed that the best predictive lags are lag of four and five quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power to real GDP growth after financial crisis. These findings can be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity