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The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan

Author

Listed:
  • Hiroshi Nakaota

    () (Faculty of Social Relations, Kyoto Bunkyo University)

  • Yuichi Fukuta

    () (Graduate School of Economics, Osaka University)

Abstract

Many studies have observed the leading indicator property of the term spread (LIPTS), which indicates that the term spread \the difference between long- and short-term interest rates \has information on future economic conditions. We examine whether this property is related to monetary policy or not by using Japanese monthly data with consideration for structural changes. Results of structural change tests show that the term spread has predictive ability for the future economic activity from 1982:4 to 1997:8. Decomposing the term spread into three parts; one is explained by past monetary policy shocks, another is explained by expected future call rates and the other is the remaining part, we find that all three parts are significantly related to the future economic growth rate. Hence, we find that the monetary policy plays an important role for the LIPTS.

Suggested Citation

  • Hiroshi Nakaota & Yuichi Fukuta, 2013. "The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan," Discussion Papers in Economics and Business 13-09-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:1309r
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1309R.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    leading indicator property of the term spread (LIPTS); term spread; future economic activity; monetary policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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