YIELD CURVE, INFLATION, EXCHANGE RATE AND THE NIGERIA’S FUTURE ECONOMIC GROWTH: A VAR APPROACH

Abstract

This paper analysed the predictive ability of the yield curve on macroeconomic variable or real 
activity (GDP) using Vector autoregressive (VAR) model for Nigeria. A quarterly data was 
utilized for the period 2003q1 to 2023q4. One popular stylized fact in macroeconomics remains 
the forecasting ability of the term spread (yield curve) for future real activity (recessions). A vector 
autoregressive model was adopted for the data analysis. Four (4) different VAR equations were 
specified according to the total number of variables under study. The 4-variables are real GDP 
growth (RGDP_G), yield curve (YC), consumer price index (CPI) and exchange rate volatility 
index (EVIX). One major finding of the paper remains the observation of the yield curve’s 
predictive ability on recessions. This was observed from the monetary policy tightening of the 
Central Bank of Nigeria (CBN), which leads to flattening of the yield curve as it reduces the net 
interest margin, reduced credit supply or loans supply or credit advancement and finally reduced 
economic activities (recession). Based on this, it has been recommended that both short-term and 
long-term interest rates be raised simultaneously to avoid flattening of the YC and in essence to 
avoid the spiral through the balance sheet monetary policy transmission mechanism.