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The Term Spread and GDP Growth in Australia

Jacob Poke and Graeme Wells
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Jacob Poke: School of Economics and Finance, University of Tasmania

No 2508, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper analyses the e¤ectiveness of the spread between short and long term interest rates for predicting GDP growth in Australia, and whether the predictive relation deteriorates, as theory suggests, with the adoption of a credible ination-targeting regime. We test whether predic- tive power is sensitive to inclusion of other conditioning variables which may be useful in forecasting GDP growth, and whether forecasting sig- ni cance is due primarily to the expected change in short-term interest rates, the term premium, or a combination of the two. In a simple bivari- ate model, results strongly suggest that the shift to a credible ination- targeting regime has reduced the predictive content of the term spread. However, extensions to this basic model tend to undermine this result. The predictive power of the term spread in Australia may have been over- sold.

Keywords: GDP; Term Spread; GDP Growth in Australia. (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-07, Revised 2007-11
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Published by Paper to be presented at RBA Workshop on Monetary Policy in Open Economies, De- cember 2007.

Downloads: (external link)
http://eprints.utas.edu.au/2508/ First version, 2007 (application/pdf)

Related works:
Journal Article: The Term Spread and GDP Growth in Australia (2009) Downloads
Working Paper: THE TERM SPREAD AND GDP GROWTH IN AUSTRALIA (2007) Downloads
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