How Useful Is the Yield Curve as a Predictor for Output Growth in Australia?

Abstract

This paper examines the predictive content of the yield curve for output growth in Australia. The results indicate that the yield curve consistently outperforms other key economic indicators in forecasting output growth in Australia, both in-sample and out-of-sample. However, the results also signal possible structural breaks in this predictive relationship, with a smaller mean squared forecast error since 1995. As such, both private investors and policy makers should be cautious when using the yield curve in the decision-making process.