Yield curve factors predict growth in some countries, not inflation

What the study found: Yield curve factors, especially slope and curvature, have predictive power for future economic growth in developed and Central and Eastern European countries. The study also finds that these factors give only limited and unstable signals for forecasting inflation.
Why the authors say this matters: The authors conclude that the yield curve can provide useful information about future economic activity, and that this information appears to depend on the credibility of monetary policy. They also suggest that forecasting performance varies across country groups.
What the researchers tested: The researchers studied 40 countries over 2010–2021, including developed, Central and Eastern European, and emerging markets. They extracted unobservable yield curve factors called level, slope, and curvature from each country's sovereign yield curve, then used panel regressions and panel forecasting methods to test how slope and curvature relate to future economic growth and inflation.
What worked and what didn't: Slope and curvature showed predictive power for economic growth in developed and CEE countries. In emerging markets, these yield curve factors shaped expectations about future growth and inflation, but their out-of-sample forecasting performance was limited. The strength of the predictive relationships was greater where monetary policy credibility was lower, while economic stability did not materially affect forecasting performance.
What to keep in mind: The abstract does not describe detailed limitations beyond noting that inflation signals were limited and unstable, and that out-of-sample forecasting was weaker in emerging markets. The summary is limited to the countries, period, and methods stated in the abstract.

Key points

• The study covers 40 countries from 2010 to 2021.
• Yield curve slope and curvature predict economic growth in developed and Central and Eastern European countries.
• Inflation forecasting from yield curve factors is described as limited and unstable.
• Predictive relationships are stronger where monetary policy credibility is lower.
• Economic stability does not materially affect forecasting performance.