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Article

The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries

1
School of Accounting, Finance and Economics, Laucala Campus, The University of the South Pacific, Suva 40302, Fiji
2
Department of Global Business and Economics, Changwon National University, Changwon 51140, Korea
3
School of Information Technology, Engineering, Mathematics, and Physics, Laucala Campus, The University of the South Pacific, Suva 40302, Fiji
*
Author to whom correspondence should be addressed.
Academic Editor: Thanasis Stengos
J. Risk Financial Manag. 2021, 14(2), 62; https://doi.org/10.3390/jrfm14020062
Received: 29 December 2020 / Revised: 27 January 2021 / Accepted: 28 January 2021 / Published: 2 February 2021
(This article belongs to the Special Issue Financial Development and Economic Growth)
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: March-1994 to December-2018, France: January-1999 to December-2018, Germany: October-2005 to December-2018, Italy: July-2009 to December-2018, Japan: July-1994 to January-2019, the UK: January-1994 to December-2018, and the US: February-1990 to January-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. View Full-Text
Keywords: term spread; economic activity; G7 countries; yield curve; regression analysis term spread; economic activity; G7 countries; yield curve; regression analysis
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MDPI and ACS Style

Kumar, R.R.; Stauvermann, P.J.; Vu, H.T.T. The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries. J. Risk Financial Manag. 2021, 14, 62. https://doi.org/10.3390/jrfm14020062

AMA Style

Kumar RR, Stauvermann PJ, Vu HTT. The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries. Journal of Risk and Financial Management. 2021; 14(2):62. https://doi.org/10.3390/jrfm14020062

Chicago/Turabian Style

Kumar, Ronald R., Peter J. Stauvermann, and Hang T.T. Vu 2021. "The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries" Journal of Risk and Financial Management 14, no. 2: 62. https://doi.org/10.3390/jrfm14020062

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