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The Term Structure and Real Activity in Canada

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  • Barry Cozier

    (Bank of Canada)

  • Greg Tkacz

    (Bank of Canada)

Abstract

This paper examines the predictive content of the term structure of interest rates for economic activity in Canada. Recent papers for the United States and other countries find that the slope of the term structure is a very good predictor of output growth. We find a strong, positive relationship between the spread across long and short rates and future changes in real GDP in Canada. This relationship is strongest at the 1-year horizon or just beyond. The term structure also helps predict inflation at horizons beyond two years in equations including the output gap and lagged inflation. Using the theoretical framework provided in the paper, we examine the conditions under which the term spread would better reflect the stance of monetary policy than a short-term interest rate and argue that these conditions are likely to be satisfied in the data.

Suggested Citation

  • Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, University Library of Munich, Germany, revised 23 Jun 1994.
    • Handle: RePEc:wpa:wuwpma:9406001
    Note: 75 printed pages, Compressed PostScript file. If you have trouble viewing the complete document, please print it out on a PostScript printer. Other recent Bank of Canada working papers are listed on the last page of this report.
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    6. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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