Monetary and financial indicators

• December 9, 1994

  The term structure of interest rates as a leading indicator of economic activity: A technical note

  Bank of Canada Review - Winter 1994-1995 Kevin Clinton

  The spread between long-term and short-term interest rates has proven to be an excellent predictor of changes of economic activity in Canada. As a general rule, when long-term interest rates have been much above short-term rates, strong increases in output have followed within about a year; however, whenever the yield curve has been inverted for any extended period of time, a recession has followed. Similar findings exist for other countries, including the United States. But although Canadian and U.S. interest rates generally move quite closely together, the Canadian yield curve has been distinctly better at predicting future Canadian output. The explanation given for this result is that the term spread has reflected both current monetary conditions, which affect short-term interest rates, and expected real returns on investment and expectations of inflation, which are the main determinants of long-term rates. This article is mainly a summary of econometric work done at the Bank. It also touches on some of the extensive recent literature in this area.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Interest rates, Monetary and financial indicators

• The Term Structure and Real Activity in Canada

  Staff Working Paper 1994-3 Barry Cozier, Greg Tkacz

  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.

  Content Type(s): Staff research, Staff working papers Topic(s): Interest rates, Monetary and financial indicators