The term spread and GDP growth in Australia

This article analyses the significance of the spread between short- and long-term interest rates for predicting GDP growth in Australia, and whether the predictive relation deteriorates, as theory suggests, with the adoption of a credible inflation-targeting regime. We test whether the significance of the term spread is sensitive to the inclusion of other conditioning variables which may be useful in forecasting GDP growth, and whether forecasting significance is due primarily to the expected change in short-term interest rates, the term premium, or a combination of the two. There is some support for the proposition that the rationally-expected term spread has become less significant with the adoption of inflation targeting.