Publications and Research
Periodicals
Bank of Canada Review
Winter 1994-1995
Index of Working Papers | Index of Technical Reports| Title | The term structure of interest rates as a leading indicator of economic activity: A technical note |
| Author(s) | Kevin Clinton |
| Type | Bank of Canada Review article |
| Date of publication |
Winter 1994-1995 |
| Language | English and French |
| Abstract |
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. |
| Bank topic index |
Interest rates; Monetary and financial indicators |
| JEL classification |
E43 |
You may download the paper in the following format(s):