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How useful is the yield spread as a predictor of growth in Australia?

Author

Listed:
  • George Chen
  • Abbas Valadkhani
  • Bligh Grant

Abstract

Purpose - – The purpose of this paper is to examine the usefulness of the yield spread for forecasting growth in the Australian economy since 1969. Design/methodology/approach - – This paper applies time series analysis to evaluate the in-sample and out-of-sample forecasting power of the spread-growth nexus in Australia for the period spanning from 1969 to 2014. Findings - – This paper concludes that the spread serves as a useful predictor of growth in output, private dwellings, private fixed capital formation, and inventories in Australia, both in-sample and out-of-sample. Its predictive content is not sensitive to the inclusion of monetary policy variables or the switch to the inflation-targeting regime by the Reserve Bank of Australia in the early 1990s. Originality/value - – This paper provides significant evidence to policy makers and market participants on the usefulness of the spread in forecasting output growth for up to eight quarters ahead.

Suggested Citation

  • George Chen & Abbas Valadkhani & Bligh Grant, 2016. "How useful is the yield spread as a predictor of growth in Australia?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 43(2), pages 222-241, May.
    • Handle: RePEc:eme:jespps:v:43:y:2016:i:2:p:222-241
    DOI: 10.1108/JES-09-2014-0159
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    Cited by:

    1. Boukhatem, Jamel & Sekouhi, Hayfa, 2017. "What does the bond yield curve tell us about Tunisian economic activity?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 295-303.

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