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The Term Structure and Real Activity in Canada

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Author Info
Barry Cozier (Bank of Canada)
Greg Tkacz (Bank of Canada)

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Abstract

This paper examines the predictive content of the term structure of interest rates for economic activity in Canada. Recent papers for the United States and other countries find that the slope of the term structure is a very good predictor of output growth. We find a strong, positive relationship between the spread across long and short rates and future changes in real GDP in Canada. This relationship is strongest at the 1-year horizon or just beyond. The term structure also helps predict inflation at horizons beyond two years in equations including the output gap and lagged inflation. Using the theoretical framework provided in the paper, we examine the conditions under which the term spread would better reflect the stance of monetary policy than a short-term interest rate and argue that these conditions are likely to be satisfied in the data.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 9406001.

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Length: 75 pages
Date of creation: 23 Jun 1994
Date of revision: 23 Jun 1994
Handle: RePEc:wpa:wuwpma:9406001

Note: 75 printed pages, Compressed PostScript file. If you have trouble viewing the complete document, please print it out on a PostScript printer. Other recent Bank of Canada working papers are listed on the last page of this report.
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E - Macroeconomics and Monetary Economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
    Other versions:
  2. Van Norden, S. & Schaller, H., 1996. "Speculative Behaviour, Regime-Switching and Stock Market Crashes," Working Papers 96-13, Bank of Canada. [Downloadable!]
    Other versions:
  3. Robert A. Amano & Simon van Norden, 1995. "Oil Prices and the Rise and Fall of the U.S. Real Exchange Rate," International Finance 9502001, EconWPA. [Downloadable!]
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Working Papers 97-10, Bank of Canada. [Downloadable!]
  2. Tracy Chan & Ramdane Djoudad & Jackson Loi, 2006. "Regime Shifts in the Indicator Properties of Narrow Money in Canada," Working Papers 06-6, Bank of Canada. [Downloadable!]
  3. Côté, Denise & Johnson, Marianne, 1998. "Consumer Attitudes, Uncertainty, and Consumer Spending," Working Papers 98-16, Bank of Canada. [Downloadable!]
  4. Jean-Francois Fillion, . "L'endettement du secteur prive au Canada: un examen macroeconomique," Working Papers 94-7, Bank of Canada. [Downloadable!]
  5. Jean-Francois Fillion, 1995. "L'endettement du secteur prive au Canada: un examen macroeconomique," Macroeconomics 9502006, EconWPA. [Downloadable!]
  6. Angélica Arosemena, . "Lecturas Alternativas de la Estructura a Plazo: Una Breve Revisión de literatura," Borradores de Economia 223, Banco de la Republica de Colombia. [Downloadable!]
  7. Atta-Mensah, Joseph & Tkacz, Greg, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Working Papers 98-5, Bank of Canada. [Downloadable!]
  8. González, Manuel, 2004. "La Curva de Retorno y el Modelo C-CAPM: Evidencia para Chile," MPRA Paper 309, University Library of Munich, Germany. [Downloadable!]
  9. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal. [Downloadable!]
  10. David Longworth & Brian O’Reilly, 2000. "The Monetary Policy Transmission Mechanism and Policy Rules in Canada," Working Papers Central Bank of Chile 72, Central Bank of Chile. [Downloadable!]
  11. Céline Gauthier & Christopher Graham & Ying Liu, 2004. "Financial Conditions Indexes for Canada," Working Papers 04-22, Bank of Canada. [Downloadable!]
  12. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, EconWPA. [Downloadable!]
  13. Phil Bodman, . "Are the Effects of Monetary Policy Asymmetric in Australia?," MRG Discussion Paper Series 0406, School of Economics, University of Queensland, Australia. [Downloadable!]
  14. Kevin Clinton, 2006. "Wicksell at the Bank of Canada," Working Papers 1087, Queen's University, Department of Economics. [Downloadable!]
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