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The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan

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  • Hiroshi Nakaota

    ()
    (Faculty of Social Relations, Kyoto Bunkyo University)

  • Yuichi Fukuta

    ()
    (Graduate School of Economics, Osaka University)

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    Abstract

    Many studies have observed the leading indicator property of the term spread (LIPTS), which indicates that the term spread\the difference between long- and short-term interest rates\ has the information on future economic conditions. We examine whether this property is related to the monetary policy or not using the Japanese monthly data with consideration for structural changes. Results of structural change tests show that the term spread has the predictive ability for the future economic activity from 1982:4 to 1997:8. Decomposing the term spread into three parts; one is explained by past monetary policy shocks, another is explained by expected future call rates and the other is the remaining part, we find that all three parts are significantly related to the future economic growth rate. Hence, we find that the monetary policy play an important role for the LIPTS.

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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 13-09.

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    Length: 34 pages
    Date of creation: May 2013
    Date of revision: Jul 2013
    Handle: RePEc:osk:wpaper:1309

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: leading indicator property of the term spread (LIPTS); term spread; future economic activity; monetary policy;

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    13. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
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