FORECASTING RECESSION IN SOUTH AFRICA: A COMPARISON OF THE YIELD CURVE AND OTHER ECONOMIC INDICATORS

The paper uses the standard probit model proposed by <link rid="b15">Estrella and Mishkin (1996)</link>, as well as the modified probit model suggested by <link rid="b12">Dueker (1997)</link>, to examine the ability of the yield curve to predict recessions in South Africa, and compares its predictive power with other commonly used variables such as the growth rate of real money supply, changes in stock prices and the index of leading economic indicators. Compared with other indicators, real M3 growth does not provide much information about future recessions, whilst movements in the All-Share index provide information for up to 12 months but do not do better than the yield curve. The index of leading economic indicators outperforms the yield spread in the short run up to 4 months but the yield spread performs better at longer horizons. Copyright (c) 2007 The Authors; Journal compilation (c) Economic Society of South Africa 2007.