Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty. (6th September 2018)

• Record Type: Journal Article
• Authors: Aye, Goodness C.; Christou, Christina; Gil‐Alana, Luis A.; Gupta, Rangan
• Is Part Of: Journal of international development. Volume 31:Number 1(2019:Jan.)
• Page Start: 101
• Page End: 116
• Publication Date: 2018-09-06
• Subjects: expected term spread -- term premium -- economic policy uncertainty -- recession -- out‐of‐sample forecast -- probit model; Economic development projects -- Developing countries -- Periodicals; Developing countries -- Economic policy -- Periodicals; Developing countries -- Foreign economic relations -- Periodicals; Economic development -- Periodicals; 330.91724
• DOI: 10.1002/jid.3395
• Languages: English
• ISSNs: 0954-1748

Abstract

Abstract: This paper decomposes the term spread into the expectation and the term premium components using a fractional integration approach and subsequently uses same with the economic policy uncertainty index to forecast the probability of recession in South Africa. We use different specifications of the probit model and quarterly data from 1990:1 to 2012:1. Our out‐of‐sample results show that the model that incorporates the expectation component and economic policy uncertainty provides the best forecast of recession. All three recession periods in our sample were accurately dictated by the prediction models and the best forecast occurred at the four quarters ahead horizon. A robustness check with a longer sample from 1946q1 to 2017q4 but excluding the factors and economic policy uncertainty due to data limitation provided justification for decomposing the term spread as the model with the expected spread turned out to be the best. We draw the implications of these findings. © 2018 John Wiley & Sons, Ltd.