Money and Capital Market

Changes in Slope of the Yield Curve and its impact on the Economy

Most of the earlier literature argues that the slope of the yield curve (the spread between long- and short-term interest rates) is a good predictor of future economic activity. The yield curves have been extensively used by investors and policy makers alike as a forecasting tool in real time to better understand the movement in future economic activities.
On the basis of above argument, this assignment is designed to evaluate how changes in yield curves impact on an economy. Students are required to select two developed economies (including Australia), compare the shape of their respective yield curves and their impact on the economies of these countries.

More specifically the students will be required to complete the following tasks:

Task1:

Critically examine the different types of yield curves that represent the structure of interest over a period from December 2009 to December, 2011.

Task 2:

The yield curve is said to be a good leading indicator of economic activity. Explain how changes in the slope of the yield curve impact on future economic prospects.
*The students are expected to utilize historical data on short term and long term interest rates for treasury securities to develop yield curve and calculate the slope of the yield curves. They are also expected to use economic indicators to make a linkage between the changes in slope of the yield curves and the economic prospects of an economy.

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