A Wavelet Evaluation of Some Leading Business Cycle Indicators for the German Economy

Leading indicators are important variables in business cycle forecasting. We use wavelet analysis to investigate the lead-lag stability of German leading indicators in time-frequency space. This method permits a time-varying relation of the leading indicators to the reference cycle allowing simultaneously to focus on lead-lag stability at the specific business cycle frequencies. In this way we analyze an index of new orders, a survey-based index of business expectations, an index of stock market returns and the interest rate term spread. We confirm that most of these indicators are indeed leading the reference cycle most of the time, but the number of months leading varies considerably over time and is associated with a great deal of estimation uncertainty.

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 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.

On the Predictive Power of the Malaysian T Bills Term Spread in Predicting Real Economic Activity

The ability of financial market interest rates to predict real economic activity has gained considerable attention of economics and financial researchers. In this regard, the term spread, i.e. the difference between long term and short term yield is argued to be an effective indicator to predict economic cycle. We investigate this proposition for the Malaysian economy using the T bills discount rates. Our results of both, single and multi-equation system of vector autoregression (VAR), support the case for Malaysia. Current T bills spread is shown to be a significant indicator for annual output growth for up to six months ahead. We also show that information conveyed by the term spread is unique and not of those implied by the monetary policy. Our results also indicate that, the power of term spread is limited for the near term prediction and over the long run money dominates spread in predicting output.