An investigation into the ability of the reverse yield gap to forecast future inflation and economic

The seminar investigates the ability of the reverse yield gap (RYG) to predict future economic growth and inflation rates in South Africa.

Keren Gossman and Mark Hayes will present the above mentioned seminar. Gossman and Hayes found no evidence that similar studies on the RYG have previously been done in the South African context.

The RYG could then be a useful input for the South African Reserve Bank (SARB) in making monetary policy decisions, specifically for incorporation into the SARB’s core macroeconomic model. In their study, they tested for linear relationships between the RYG and economic growth and inflation over the period 1960 to 2014.

The results indicate that a slight linear relationship may exist in the case of economic growth, with the RYG based on earnings yields showing better out-of-sample forecasting abilities. Further investigation indicates that the linear relationship is stronger during times of economic upturn.

The results for inflation forecasting, however, show no signs of a reasonable linear relationship. The authors therefore believe that there is evidence for the SARB to consider whether the RYG can replace other economic variables in its core model without loss of predictive ability. Interestingly, this study found evidence to suggest that the RYG has an inverse relationship to future economic growth in South Africa, which is not what was expected.

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