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

George Chen (UNE Business School, University of New England, Armidale, Australia)
Abbas Valadkhani (UNE Business School, University of New England, Armidale, Australia; AND School of Business and Law, Swinburne University of Technology, Hawthorn, Australia)
Bligh Grant (Centre of Local Government, University of Technology, Sydney, Australia)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 9 May 2016

360

Abstract

Purpose

The purpose of this paper is to examine the usefulness of the yield spread for forecasting growth in the Australian 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.

Originality/value

This paper provides significant evidence to policy makers and market participants on the usefulness of the spread in forecasting output growth for up to eight quarters ahead.

Keywords

Acknowledgements

The authors wish to thank Professor Mohsen Bahmani-Oskooee (the Editor) and two anonymous referees, whose useful comments substantially improved an earlier version of this paper. The usual caveat applies.

Citation

Chen, G., Valadkhani, A. and Grant, B. (2016), "How useful is the yield spread as a predictor of growth in Australia?", Journal of Economic Studies, Vol. 43 No. 2, pp. 222-241. https://doi.org/10.1108/JES-09-2014-0159

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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