The leading indicator property of the term spread and the monetary policy factors in Japan

Hiroshi Nakaota and Yuichi Fukuta

Japan and the World Economy, 2013, vol. 28, issue C, 85-98

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.

Keywords: Leading indicator property of the term spread (LIPTS); Term spread; Future economic activity; Monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:japwor:v:28:y:2013:i:c:p:85-98

DOI: 10.1016/j.japwor.2013.08.001

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