This paper analyses the effectiveness 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 inflation-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?ficance 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 inflation- 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number
2007-27.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: