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The Term Spread and GDP Growth in Australia

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Poke, J and Wells, G (2007) The Term Spread and GDP Growth in Australia. Discussion Paper. School of Economics and Finance, University of Tasmania.

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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 in�ation-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 in�ation-
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.

Item Type: Report (Discussion Paper)
Keywords: GDP, Term Spread, GDP Growth in Australia, REPEC
Publisher: School of Economics and Finance
Identification Number - DOI: 2007-07
Date Deposited: 22 Nov 2007 01:33
Last Modified: 18 Nov 2014 03:25
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