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

  • Hiroshi Nakaota

    ()

    (Faculty of Social Relations, Kyoto Bunkyo University)

  • Yuichi Fukuta

    ()

    (Graduate School of Economics, Osaka University)

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    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.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1309R.pdf
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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 13-09-Rev.

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    Length: 34 pages
    Date of creation: Jul 2013
    Date of revision:
    Handle: RePEc:osk:wpaper:1309r
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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