Author:
Zulkhibri Muhamed,Abdul Rani Mohamed Shukri
Abstract
Purpose
This paper aims to examine the role of term spreads to predict domestic output and inflation in Malaysia, a country with a relatively less-developed bond market.
Design/methodology/approach
The paper uses regression time-series regressions and probit models that control for past values of the dependent variable to determine the forecast performance of term spread on inflation and output in Malaysia.
Findings
The paper finds that term spread contains little information about future output and inflation at short horizons. Moreover, the usefulness of term spread to play a greater role in monetary analysis beyond conventional indicators in the case of Malaysia is limited. The degree of usefulness of term spread impediment could be attributed to the relatively fragmented, illiquid and captive bond market characteristics as compared to what is available in more matured and developed markets.
Practical implications
It is useful to incorporate technical and model-based approaches using yield curves beyond the usual indicator analysis from the policy point of view. Models could be used in tandem with other monetary and financial indicators to support discussions on the direction of monetary policy.
Originality/value
An efficient bond market could also play an important role in propagating monetary impulses via the relevant monetary transmission channels. Based on the findings, the paper suggests that there is a strong case to deepen domestic bond market. This would greatly enhance price discovery among market participants, improve risk management away from the traditional source for funds (i.e. banking system) and address supply-related issues.
Subject
General Economics, Econometrics and Finance,Finance,Accounting
Reference45 articles.
1. Predicting output using the entire yield curve;Journal of Macroeconomics,2013
2. Likelihood of a model and information criteria;Journal of Econometrics,1981
3. Liquidity, term spreads and monetary policy;Economic Journal,2014
4. Alessandri, P. and Mumtaz, H. (2014), “Financial conditions and density forecasts for US output and inflation”, Working Paper No. 715, School of Economics and Finance, Queen Mary University, London.
Cited by
4 articles.
订阅此论文施引文献
订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献