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The Term Spread and GDP Growth in Australia

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Author Info

  • Jacob Poke

    (School of Economics and Finance, University of Tasmania)

  • Graeme Wells

    ()
    (School of Economics and Finance, University of Tasmania)

Abstract

This 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 in‡ation-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 in‡ation- 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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File URL: http://eprints.utas.edu.au/2508/
File Function: First version, 2007
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 2508.

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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.
Handle: RePEc:tas:wpaper:2508

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Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/
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Related research

Keywords: GDP; Term Spread; GDP Growth in Australia.;

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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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