How useful is the yield spread as a predictor of growth in Australia?

Publisher:
Emerald
Publication Type:
Journal Article
Citation:
Journal of Economic Studies, 2016, 43 (2), pp. 222 - 241
Issue Date:
2016
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Purpose – This paper examines the usefulness of the yield spread in forecasting growth in the Australia economy since 1969. Design/Methodology/approach – This paper applies time series analysis to evaluate the in-sample and out-of-sample forecasting power of the spread-growth nexus in Australia for the period spanning from 1969 to 2014. Findings – This paper concludes that the spread serves as a useful predictor of growth in output, private dwellings, private fixed capital formation, and inventories in Australia, both in-sample and out-of-sample. Its predictive content is not sensitive to the inclusion of monetary-policy variables or the switch to the inflation-targeting regime by the Reserve Bank of Australia in the early 1990s. Original/value – This paper provides compelling evidence to policy makers and market participants on the usefulness of the spread in forecasting output growth for up to eight quarters ahead.
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