The Australian yield curve as a leading indicator of consumption growth

Abstract

The purpose of the reported research is to determine if Australia's real consumption growth is predicted by real and/or nominal yield spreads. To this end, a model of the relationship between consumption growth and interest rates is derived from neoclassical, utility maximizing premises. This theoretical foundation is applied to quarterly Australian data over the period 1983:4 to 1995:4. The time series on real consumption and yield spreads is stationary. Initial OLS estimates are subjected to the Newey West transformation and show that all ‘real’ spreads from one quarter to two years are significant, but at the short end these are of the wrong sign. Nominal spreads of one and two year length influence real consumption growth. The model provides accurate out-of-sample predictions. GMM estimation of the relationship between real spreads and real consumption are significant and of the correct sign at the longer end of the yield curve. Policy implications are indicated.