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The Term Structure and Real Activity in Canada

Author

Listed:
  • Barry Cozier

    (Bank of Canada)

  • Greg Tkacz

    (Bank of Canada)

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. Dans la presente etude, les auteurs examinent la capacite de prevision de la structure a terme des taux d'interet au regard de l'activite economique au Canada. Des etudes recentes menees aux Etats-Unis et dans d'autres pays ont montre que la pente de la structure des taux d'interet est un tres bon indicateur avance de la croissance de la production. Selon les auteurs, il existe une forte relation positive entre l'ecart des taux a long et a court terme et les variations futures du PIB reel au Canada. La relation la plus forte est observee pour les horizons d'un an ou un peu plus. La structure a terme des taux d'interet sert aussi a prevoir l'inflation sur des horizons de plus de deux ans dans des equations comprenant l'ecart de production et l'inflation retardee. A l'aide du cadre theorique retenu, les auteurs analysent les conditions dans lesquelles l'ecart entre les taux a long terme et les taux a court terme refleterait mieux l'orientation de la politique monetaire qu'un taux a court terme et soutiennent que les donnees semblent satisfaire ces conditions.

Suggested Citation

  • Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
    • Handle: RePEc:bca:bocawp:94-3
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    References listed on IDEAS

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