The Term Spread and GDP Growth in Australia
AbstractThis paper analyses the e¤ectiveness 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 ination-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 cance 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 ination- 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 InfoPaper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 2508.
Length: 32 pages
Date of creation: Jul 2007
Date of revision: Nov 2007
Publication status: Published by Paper to be presented at RBA Workshop on Monetary Policy in Open Economies, De- cember 2007.
GDP; Term Spread; GDP Growth in Australia.;
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- 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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