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The Term Spread And Gdp Growth In Australia

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  • Jacob Poke
  • Graeme Wells

Abstract

This paper analyses the effectiveness 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 inflation-targeting regime. We test whether predictive power is sensitive to inclusion of other conditioning variables which may be useful in forecasting GDP growth, and whether forecasting significance is due primarily to the expected change in short-term interest rates, the term premium, or a combination of the two. In a simple bivariate model, results strongly suggest that the shift to a credible inflation-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.

Suggested Citation

  • Jacob Poke & Graeme Wells, 2007. "The Term Spread And Gdp Growth In Australia," CAMA Working Papers 2007-27, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2007-27
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/27_poke_wells_2007.pdf
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    Cited by:

    1. Robert J. Bianchi & Michael E. Drew & Timothy Whittaker, 2016. "The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-18, December.
    2. Jiyoung Lee, 2015. "Disentangling the Predictive Power of Term Spreads under Inflation Targeting," International Economic Journal, Taylor & Francis Journals, vol. 29(3), pages 419-450, September.
    3. 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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