The Term Structure and Real Activity in Canada

Working Paper: 94-3

Posted: 25 Aug 1998

See all articles by Barry Cozier

Barry Cozier

affiliation not provided to SSRN

Greg Tkacz

Saint Francis Xavier University - Economics

Date Written: March 1994

Abstract

This paper examines the predictive content of the term structure of interest rates for economic activity in Canada. Recent papers for the United States and other countries find that the slope of the term structure is a very good predictor of output growth. We find a strong, positive relationship between the spread across long and short rates and future changes in real GDP in Canada. This relationship is strongest at the 1-year horizon or just beyond. The term structure also helps predict inflation at horizons beyond two years in equations including the output gap and lagged inflation. Using the theoretical framework provided in the paper, we examine the conditions under which the term spread would better reflect the stance of monetary policy than a short-term interest rate and argue that these conditions are likely to be satisfied in the data.

JEL Classification: E43, E47

Suggested Citation

Cozier, Barry and Tkacz, Greg, The Term Structure and Real Activity in Canada (March 1994 ). Working Paper: 94-3. Available at SSRN: https://ssrn.com/abstract=6545

Barry Cozier (Contact Author)

affiliation not provided to SSRN

Greg Tkacz

Saint Francis Xavier University - Economics ( email )

Nicholson Hall, Room 505
P.O. Box 5000
Nova Scotia
Canada

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