Empirical evidence on the relationship between the term structure of interest rates and future real output changes when there are changes in policy regimes. (Q1853642)

In this article we test for the structural stability of an output growth forecasting equation that includes the term structure of interest rates as a regressor, for the USA and Canada. We are able to confirm that there is parameter instability as the coefficient associated with the term structure is reduced in size as the policy maker becomes more averse to inflation. Our empirical results are in accordance with the theoretical predictions.