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Forecasting macroeconomic variables through the term structure of interest rates in China

Zhang, Chen
(2022)

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zhangchen_24501900_2022.pdf
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Details

Supervisors
Leonardo Iania
Faculty
Louvain School of Management
Degree label
Master [120] en sciences de gestion, à finalité spécialisée
Abstract
With the reform of China's interest rate market, it is crucial to investigate the predictive ability of the term structure of interest rates on macroeconomic variables. According to previous studies, the term structure of interest rates contains a wealth of financial information. Expectation theory provides an explanation for the predictive power of the term structure of interest rates on macroeconomic variables. In addition, the term structure of interest rates reflects monetary policy, which is a decision based on future economic conditions. Therefore, the term structure of interest rates contains information about the future economy. The purpose of this paper is to investigate the interest rate term structure's predictive ability on macroeconomic variables in China. This paper forecasts the Industrial Added Value, Investment in Fixed Assets, China Coincident Index, and Consumer Price Index in China by using the term spread between 10-year and 1-year bonds. The empirical part of the study finds that the term structure of China's interest rates cannot fully predict various macroeconomic variables by using the liner regression method. The term spread has a good ability to predict Investment in Fixed Assets, but does not have the ability to predict Industrial Added Value, China Coincident Index, and Inflation.