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The Term Structure and Real Activity in Canada

  • Barry Cozier

    (Bank of Canada)

  • Greg Tkacz

    (Bank of Canada)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 9406001.

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Length: 75 pages
Date of creation: 23 Jun 1994
Date of revision: 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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References listed on IDEAS
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  1. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
  2. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
  3. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 299-316, April.
  4. Van Norden, S. & Schaller, H., 1996. "Speculative Behaviour, Regime-Switching and Stock Market Crashes," Working Papers 96-13, Bank of Canada.
  5. Wirjanto, T.S. & Amano, R.A., 1993. "The Dynamic Demand for Money in Germany, Japan and the United Kingdom," Working Papers 9314, University of Waterloo, Department of Economics.
  6. 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.
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