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Interest rate spread and real activity: evidence for the UK

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  • David McMillan

Abstract

Results of recent studies for the USA, Canada and Australia have suggested that the term structure of interest rates contains predictive power for real GDP growth, and that this result is robust to the inclusion of additional variables, such as stock market indicators and lagged growth rates. Using a k-quarter growth rate model this paper attempts to ascertain whether similar results are obtained for the UK. In short, the results suggested here state that although the interest rate spread between the 10-year governemt bond and the 3-month T-bill contains some predictive power for UK output growth, it is less than reported for other countries. Finally, this result is robust to the inclusion of lagged growth and the FT-ALL index return, the latter leading to a marginal improvement in predictive power.

Suggested Citation

  • David McMillan, 2002. "Interest rate spread and real activity: evidence for the UK," Applied Economics Letters, Taylor & Francis Journals, vol. 9(3), pages 191-194.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:3:p:191-194
    DOI: 10.1080/13504850110054922
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    References listed on IDEAS

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    1. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
    2. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    3. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
    4. Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
    5. Bernard, Henri & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 195-215, July.
    6. Philip Lowe, 1992. "The Term Structure of Interest Rates, Real Activity and Inflation," RBA Research Discussion Papers rdp9204, Reserve Bank of Australia.
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    Cited by:

    1. Gomez-Biscarri, Javier, 2008. "Changes in the informational content of term spreads: Is monetary policy becoming less effective?," Journal of Economics and Business, Elsevier, vol. 60(5), pages 415-435.
    2. Valadkhani, Abbas, 2004. "Does the Term Structure Predict Australia's Future Output Growth?," Economic Analysis and Policy, Elsevier, vol. 34(2), pages 121-144, September.
    3. David Cademartori & Rodrigo Navia & Manuel Galea & Felipe Osorio, 2008. "Prediction of the economic activity from the short and long-term interest rate differential: new evidences in Chile and the United States of America cases," Applied Economics Letters, Taylor & Francis Journals, vol. 15(9), pages 707-712.
    4. Javier Gómez, 2007. "Changes in the Informational Content of the Spread: Is Monetary Policy Becoming Less Effective?," Faculty Working Papers 05/07, School of Economics and Business Administration, University of Navarra.

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