The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries
The yield curve is an important tool to assess the economic progress of a country. In this study, we examine the strength of the relationship between term spread and economic activity, and between the components of the yield curve and economic activity in the G7 countries using monthly data on yield...
Main Authors: | , , |
---|---|
Format: | Article |
Language: | English |
Published: |
MDPI AG
2021-02-01
|
Series: | Journal of Risk and Financial Management |
Subjects: | |
Online Access: | https://www.mdpi.com/1911-8074/14/2/62 |
id |
doaj-bf5b6a828b204499a20f53aef3122519 |
---|---|
record_format |
Article |
spelling |
doaj-bf5b6a828b204499a20f53aef31225192021-02-03T00:04:23ZengMDPI AGJournal of Risk and Financial Management1911-80661911-80742021-02-0114626210.3390/jrfm14020062The Relationship between Yield Curve and Economic Activity: An Analysis of G7 CountriesRonald Ravinesh Kumar0Peter Josef Stauvermann1Hang Thi Thu Vu2School of Accounting, Finance and Economics, Laucala Campus, The University of the South Pacific, Suva 40302, FijiDepartment of Global Business and Economics, Changwon National University, Changwon 51140, KoreaSchool of Information Technology, Engineering, Mathematics, and Physics, Laucala Campus, The University of the South Pacific, Suva 40302, FijiThe yield curve is an important tool to assess the economic progress of a country. In this study, we examine the strength of the relationship between term spread and economic activity, and between the components of the yield curve and economic activity in the G7 countries using monthly data on yield rates and seasonally adjusted data on the industrial production index (IPI). After matching the start and end date of the IPI with the yield rates, the data used and respective time period are as follows: Canada: Mar-1994 to Dec-2018, France: Jan-1999 to Dec-2018, Germany: Oct-2005 to Dec-2018, Italy: Jul-2009 to Dec-2018, Japan: Jul-1994 to Jan–2019, the UK: Jan-1994 to Dec-2018, and the US: Feb-1990 to Jan-2019. The results show positive associations between term spread and economic activity for Canada, France, Germany, Japan, the UK, and the US. For Italy, a negative association is noted. All three empirical factors could predict economic activity for France and Germany at the 12-month horizon only. For all other horizons, the factors’ ability to predict economic activity varies. We observe that by including additional macro-finance variables such as the current economic growth rate and the 3-month yield rate to capture the term structure level effects, the relationship between term spread and economic activity becomes stronger. This implies that the usefulness of yield curve and its decomposed components for the purpose of predicting economic activity should be cautiously modelled and employed for policy.https://www.mdpi.com/1911-8074/14/2/62term spreadeconomic activityG7 countriesyield curveregression analysis |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Ronald Ravinesh Kumar Peter Josef Stauvermann Hang Thi Thu Vu |
spellingShingle |
Ronald Ravinesh Kumar Peter Josef Stauvermann Hang Thi Thu Vu The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries Journal of Risk and Financial Management term spread economic activity G7 countries yield curve regression analysis |
author_facet |
Ronald Ravinesh Kumar Peter Josef Stauvermann Hang Thi Thu Vu |
author_sort |
Ronald Ravinesh Kumar |
title |
The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries |
title_short |
The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries |
title_full |
The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries |
title_fullStr |
The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries |
title_full_unstemmed |
The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries |
title_sort |
relationship between yield curve and economic activity: an analysis of g7 countries |
publisher |
MDPI AG |
series |
Journal of Risk and Financial Management |
issn |
1911-8066 1911-8074 |
publishDate |
2021-02-01 |
description |
The yield curve is an important tool to assess the economic progress of a country. In this study, we examine the strength of the relationship between term spread and economic activity, and between the components of the yield curve and economic activity in the G7 countries using monthly data on yield rates and seasonally adjusted data on the industrial production index (IPI). After matching the start and end date of the IPI with the yield rates, the data used and respective time period are as follows: Canada: Mar-1994 to Dec-2018, France: Jan-1999 to Dec-2018, Germany: Oct-2005 to Dec-2018, Italy: Jul-2009 to Dec-2018, Japan: Jul-1994 to Jan–2019, the UK: Jan-1994 to Dec-2018, and the US: Feb-1990 to Jan-2019. The results show positive associations between term spread and economic activity for Canada, France, Germany, Japan, the UK, and the US. For Italy, a negative association is noted. All three empirical factors could predict economic activity for France and Germany at the 12-month horizon only. For all other horizons, the factors’ ability to predict economic activity varies. We observe that by including additional macro-finance variables such as the current economic growth rate and the 3-month yield rate to capture the term structure level effects, the relationship between term spread and economic activity becomes stronger. This implies that the usefulness of yield curve and its decomposed components for the purpose of predicting economic activity should be cautiously modelled and employed for policy. |
topic |
term spread economic activity G7 countries yield curve regression analysis |
url |
https://www.mdpi.com/1911-8074/14/2/62 |
work_keys_str_mv |
AT ronaldravineshkumar therelationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries AT peterjosefstauvermann therelationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries AT hangthithuvu therelationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries AT ronaldravineshkumar relationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries AT peterjosefstauvermann relationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries AT hangthithuvu relationshipbetweenyieldcurveandeconomicactivityananalysisofg7countries |
_version_ |
1724290327907401728 |