Research On The Term Structure Of Interest Rates' Predictive Power For Future Economic Variables In China

Interest rate is one of the most important economic indicators in the current economical life and it plays a very important role in everyone's daily life. The term structure of interest rates indicates the functional relationship between the interest rates and the yield to maturity of zero bonds, and it contains abundant information about economy. Many years ago, many scholars have engaged in the research on the term structure of interest rates'predictive power for future economic activities. Usually they used the term spread to explore the term structure's predictive power for future economic activities, while the term spread illustrates the difference between the long-term and the short-term rates. It is generally believed that the term structure of interest rates contained a lot of information of future economic growth, future inflation and future interest rates changes. The purpose of this article is to explore the term structure of interest rates'predictive power for the future macroeconomic variables in China.With the deepening of China's market economy, it is quite significant to explore the investigation of the predictive power of the yield curve for future economic activities, mainly for the reason that stakeholders would make immediate and relevant business decisions after the knowledge of future economic movement:for the monetary policy-makers, the central bank can implement the corresponding policies, when the future economic movement can be predicated appropriately; for the business sector,making exact according to prediction of future economic movement, they can make exact investment and consumer decision, and they can get a more generous return which mainly come from the forward -looking and correct decisions; they can make a good decision of the bonds investment according to the information came from the term structure of interest rates because of it containing the future interest rates changes. Besides, the subprime crisis caused a more violent fluctuation of the economy, if we want to have a unbiased prediction of the future economic crisis, we can use the information contained in the term structure of interest rates. In another word, by using the term structure of interest rates, we can get the rational forecast of bonds' future yield of different kinds and terms, and so can get the effective forecast of some macro economic index to help make a correct and effective decision.Several critical term spreads were adopted in this paper according to the interest rates of those specified maturities of the bonds which had to be traded by market-makers, such as one years, two years, three years, five years, seven years, ten years, fifteen years and thirty years. In this paper, two types models were established, the first type model used the critical term spreads alone as the independent variable to test the term structure of interest rates'predictive power. While the second type model basing on the first model, plus the lagged dependent variable and the monetary policy variable of M2. All the model in the empirical analysis in this article, we use the time series analysis and use the AR(p) model to modify the model's series correlation. Finally, we can have an evaluation about the term structure of interest rates'predictive power in China.According to the above analysis, this paper get the conclusion as follows:1. It is not possible to use the term structure alone to have a good predictive power for future economic growth. While considering the pre-economic conditions (investment, consumption, import and export) and the critical term spreads, the empirical results showing that it is possible to have some degree of forecast of the future economic growth.2. Considering the critical term spread alone, spread1001,spread 1002 and spread 1003 have a good predictive power for the next 6 month's inflation, and spread 1501 and spread1502 can predict the next 6 month and 1year's inflation, but the power is weak. While considering the monetary policy M2 and the pre-inflation, spread 1001,spread 1002,spread D003,spread 1501,spread 1502,spread 1503,spread 1507,spread 3001,spread 3003,spread 3007 and spread 3010 can predict both the next 6 month and 1 year's inflation.3. The term structure of interest rates can't predict the future interest rates changes. This may be because the theory of term structure of interest rates predicting the future interest rates changes basing on the expectation theory which requires the bond market expected to be highly effective, but the current Chinese bond market is not effective. So our empirical results are consistent with the theoretical expectations.With the continuing reform and deepening of China's market economy, nations, institutions and individuals will be exposed more to market risk than before. for better risk management,forecasting and early response to the crisis, the state must build a set of macroeconomic warning system, while the term structure of interest rates is a very important early warning indicators. Foreign experiences show that the term structure of interest rates is a forward-looking index. So in the process of building the early warning system for macroeconomic, we must pay great important attention to the term structure of interest rates. If we understand and get the abundant information contained in the term structure of interest rates, we can make better investment and management risks decision.