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

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.