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Does The Term Structure Predict Australia’S Future Output Growth?

  • Abbas Valadkhani

This paper examines whether the term structure of interest rates provides predictive power for real output growth using quarterly time series data from 1980:1 to 2002:2. The empirical results are consistent with previous studies undertaken for France, Germany and the UK as well as earlier Australian works. It is found that a 10 per cent increase in the interest rate spread between the 10-year Treasury bond and the 90-day bank bill results in approximately 4 per cent rise in GDP growth over the succeeding seven-nine quarters. This result is robust to the inclusion of two other relevant predictors in the accumulated future growth equation, namely the growth rate of M1, and the growth rate of the S&P/ASX 200 share price index. It is also argued that after the US, the interest rate spread possesses relatively more predictive power for Australian GDP growth than those for France, Germany and the UK.

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Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 139.

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Date of creation: 20 Feb 2003
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Handle: RePEc:qut:dpaper:139
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  1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
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  3. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
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  5. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
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  9. Lakshman Alles, 1995. "The Australian Term Structure as a Predictor of Real Economic Activity," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 28(4), pages 71-85.
  10. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  11. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
  12. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994.
  13. E. P. Davis & S. G. B. Henry, 1994. "The Use of Financial Spreads as Indicator Variables: Evidence for the United Kingdom and Germany," IMF Staff Papers, Palgrave Macmillan, vol. 41(3), pages 517-525, September.
  14. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
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