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The Term Spread And Gdp Growth In Australia

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  • Jacob Poke
  • Graeme Wells

    ()

Abstract

This paper analyses the effectiveness of the spread between short and long term interest rates for predicting GDP growth in Australia, and whether the predictive relation deteriorates, as theory suggests, with the adoption of a credible inflation-targeting regime. We test whether predic- tive power is sensitive to inclusion of other conditioning variables which may be useful in forecasting GDP growth, and whether forecasting sig- ni?ficance is due primarily to the expected change in short-term interest rates, the term premium, or a combination of the two. In a simple bivari- ate model, results strongly suggest that the shift to a credible inflation- targeting regime has reduced the predictive content of the term spread. However, extensions to this basic model tend to undermine this result. The predictive power of the term spread in Australia may have been over- sold.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-27.

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Length: 31 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-27

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Cited by:
  1. Watson, John & Wickramanayake, J., 2012. "The relationship between aggregate managed fund flows and share market returns in Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 451-472.

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