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The Australian yield curve as a leading indicator of consumption growth


  • Chay Fisher
  • Bruce Felmingham


The purpose of the reported research is to determine if Australia's real consumption growth is predicted by real and/or nominal yield spreads. To this end, a model of the relationship between consumption growth and interest rates is derived from neoclassical, utility maximizing premises. This theoretical foundation is applied to quarterly Australian data over the period 1983:4 to 1995:4. The time series on real consumption and yield spreads is stationary. Initial OLS estimates are subjected to the Newey West transformation and show that all 'real' spreads from one quarter to two years are significant, but at the short end these are of the wrong sign. Nominal spreads of one and two year length influence real consumption growth. The model provides accurate out-of-sample predictions. GMM estimation of the relationship between real spreads and real consumption are significant and of the correct sign at the longer end of the yield curve. Policy implications are indicated.

Suggested Citation

  • Chay Fisher & Bruce Felmingham, 1998. "The Australian yield curve as a leading indicator of consumption growth," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 627-635.
  • Handle: RePEc:taf:apfiec:v:8:y:1998:i:6:p:627-635
    DOI: 10.1080/096031098332664

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    References listed on IDEAS

    1. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
    2. Philip Lowe, 1992. "The Term Structure of Interest Rates, Real Activity and Inflation," RBA Research Discussion Papers rdp9204, Reserve Bank of Australia.
    3. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
    4. Nilss Olekalns, 1992. "Do Share Prices and Interest Rates Provide Information About Future Real Activity? Some Evidence from Australia," Working Papers 1992.26 EDIRC Provider-In, School of Economics, La Trobe University.
    5. Nilss Olekalns, 1992. "Do Share Prices and Interest Rates Provide Information About Future Real Activity? Some Evidence from Australia," Working Papers 1992.26, School of Economics, La Trobe University.
    6. Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
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    Cited by:

    1. Periklis Gogas & Ioannis Pragidis, 2012. "GDP trend deviations and the yield spread: the case of eight E.U. countries," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(1), pages 226-237, January.
    2. Bruce Felmingham & Su San Leong, 2003. "The stationarity of Australian real interest rates with and without structural breaks," Applied Economics Letters, Taylor & Francis Journals, vol. 10(4), pages 239-241.
    3. repec:eee:riibaf:v:42:y:2017:i:c:p:295-303 is not listed on IDEAS
    4. Gogas, Periklis & Pragidis, Ioannis, 2010. "GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries," DUTH Research Papers in Economics 2-2010, Democritus University of Thrace, Department of Economics.
    5. Arif Dar & Amaresh Samantaraya & Firdous Shah, 2014. "The predictive power of yield spread: evidence from wavelet analysis," Empirical Economics, Springer, vol. 46(3), pages 887-901, May.
    6. Benjamin Ford & Karen Taylor, 2005. "Recent developments in Australian bond yields," Economic Roundup, The Treasury, Australian Government, issue 4, pages 111-120, December.
    7. Hyde, Stuart & Sherif, Mohamed, 2010. "Consumption asset pricing and the term structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 99-109, February.
    8. Rendu de Lint, Christel & Stolin, David, 2003. "The predictive power of the yield curve: a theoretical assessment," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1603-1622, October.

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