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Testing for asymmetry in the link between the yield spread and output in the G-7 countries

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  • Galbraith, John W.
  • Tkacz, Greg

Abstract

The difference in yields between long-term and short-term securities has been used both as a business cycle leading indicator and as an indicator of the current impact of monetary policy. This paper tests for an asymmetry, in the form of a threshold effect, such that the impact of the yield spread on output is greater on one side of the threshold than the other. The test allows for an unknown threshold, and the asymptotic distribution of the resulting statistic is obtained by the method of Hansen (1996). We test using data from each of the G-7 countries, and find that, while the yield spread does generally show a signifcant link with output, only in the U.S. and Canada is there strong evidence of an asymmetry of this type. The evidence of asymmetry that we find suggests a high value of the threshold in both the U.S. and Canada.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 19 (2000)
Issue (Month): 5 (October)
Pages: 657-672

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Handle: RePEc:eee:jimfin:v:19:y:2000:i:5:p:657-672

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Web page: http://www.elsevier.com/locate/inca/30443

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  1. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  2. Donald P. Morgan, 1993. "Asymmetric effects of monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 21-33.
  3. Karras, Georgios, 1996. "Are the Output Effects of Monetary Policy Asymmetric? Evidence from a Sample of European Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 267-78, May.
  4. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
  5. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994.
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  7. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
  8. Alan S. Blinder, 1996. "Central banking in a democracy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-14.
  9. Galbraith, John W, 1996. "Credit Rationing and Threshold Effects in the Relation between Money and Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 419-29, July-Aug..
  10. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
  11. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  12. M. A. Akhtar, 1995. "Monetary Policy And Long-Term Interest Rates: A Survey Of Empirical Literature," Contemporary Economic Policy, Western Economic Association International, vol. 13(3), pages 110-130, 07.
  13. Wesley C. Mitchell & Solomon Fabricant, 1938. "Statistical Indicators of Cyclical Revivals," NBER Books, National Bureau of Economic Research, Inc, number mitc38-1, July.
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