Does the term structure of interest rate predict real economic activity? Nonlinear evidence from Turkey

Abstract

In this chapter we investigate whether the term structure of interest rates contains useful information about future real economic activity in Turkey for the period 1995:1 to 2003:3. The best model to describe the relationship between the term structure of interest rate and real economic activity in Turkey has been found to be Multiple Regime Smooth Transition Regression (MR-STR) model. Our results show that the relationship between the term structure of interest rates and the future economic activity is negative and significant in economic expansion and contraction periods, while it becomes positive and insignificant in moderate growth periods. In order to analyze these relationships, we employ correlation analysis by using nonparametric estimation technique. The results of correlation analysis are found to be consistent with the recursive Chow test and parameter stability tests. In addition, the correlation analysis indicates that the negative effects of the spread on real output can be explained by the interaction between the effects of the Expectation Hypothesis and Interest Transmission Channel. © 2012 by Nova Science Publishers, Inc. All rights reserved.