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Forecasting inflation from the term structure

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  • Tzavalis, Elias
  • Wickens, M. R.

Abstract

This paper presents new evidence about the information contained in the term structure about future inflation. Although the general finding in the literature is that the greater the time horizon the more information the term structure possesses about inflation, in this paper we show that the forecasting ability of the term spread is very poor. The main finding of the paper is that the real interest rate contains far more information about future inflation that the term spread.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 3 (1996)
Issue (Month): 1 (May)
Pages: 103-122

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Handle: RePEc:eee:empfin:v:3:y:1996:i:1:p:103-122

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Web page: http://www.elsevier.com/locate/jempfin

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References

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  1. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  4. Martin D. Evans & Karen K. Lewis, 1992. "Do Stationary Risk Premia Explain It All? Evidence from the Term Structure," Working Papers 92-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Tzavalis, Elias & Wickens, Micheal, 1994. "The Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence," Discussion Papers 9402, Exeter University, Department of Economics.
  6. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
  7. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  8. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
  9. Jeffrey A. Frankel & Cara S. Lown, 1991. "An indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length," Research Paper 9122, Federal Reserve Bank of New York.
  10. Gikas A. Hardouvelis, 1987. "The predictive power of the term structure during recent monetary regimes," Research Paper 8708, Federal Reserve Bank of New York.
  11. John B. Shoven & Scott B. Smart & Joel Waldfogel, 1991. "Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium," NBER Working Papers 3754, National Bureau of Economic Research, Inc.
  12. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  13. Fama, Eugene F. & Gibbons, Michael R., 1984. "A comparison of inflation forecasts," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 327-348, May.
  14. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  15. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  16. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  17. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  18. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  19. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  20. Mishkin, Frederic S, 1988. "The Information in the Term Structure: Some Further Results," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 307-14, October-D.
  21. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  22. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  23. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  24. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
  25. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
  26. Benninga, Simon & Protopapadakis, Aris, 1983. "Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 856-67, October.
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Citations

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Cited by:
  1. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.
  2. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  3. Jesús Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Grünwald, 2005. "The Term Structure as a Predictor of Real Activity and Inflation in the Euro Area: A Reassessment," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(2), pages 318-342, July.
  4. Browne, Frank & Everett, Mary, 2006. "The Real Interest Rate Spread as a Monetary Policy Indicator," Research Technical Papers 6/RT/06, Central Bank of Ireland.
  5. Carstensen, Kai & Hawellek, J., 2003. "Forecasting Inflation from the Term Structure," Munich Reprints in Economics 19949, University of Munich, Department of Economics.
  6. repec:spo:wpecon:info:hdl:2441/2129 is not listed on IDEAS
  7. Faria, Joao Ricardo & Mollick, Andre Varella, 2004. "The nominal theory of interest under habit formation: evidence for the U.S., 1959-2002," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 333-354, December.
  8. Lee, Jin, 2005. "Estimating memory parameter in the US inflation rate," Economics Letters, Elsevier, vol. 87(2), pages 207-210, May.
  9. Kai Carstensen, 2006. "Estimating the ECB Policy Reaction Function," German Economic Review, Verein für Socialpolitik, vol. 7, pages 1-34, 02.
  10. Martin Evans, 2002. "Real Risk, Inflation Risk, and the Term Structure," Working Papers gueconwpa~02-02-10, Georgetown University, Department of Economics.
  11. Matthieu Lemoine & Florian Pelgrin, 2003. "Introduction aux modèles espace état et au filtre de Kalman," Sciences Po publications info:hdl:2441/2129, Sciences Po.
  12. Francisco Alonso-Sánchez & Juan Ayuso-Huertas & Jorge Martínez-Pagés, 2000. "El contenido informativo de los tipos de interés sobre la tasa de inflación española," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 455-471, May.
  13. Pons Novell, J., 2002. "Ciclo de la economía española y contenido informativo de los tipos de interés," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 20, pages 583-598, Diciembre.
  14. Palle S. Andersen, 1997. "Forecast errors and financial developments," BIS Working Papers 51, Bank for International Settlements.
  15. Andrea Beccarini, 2007. "Investment sensitivity to interest rates in an uncertain context: is a positive relationship possible?," Economic Change and Restructuring, Springer, vol. 40(3), pages 223-234, September.
  16. Chopin, Nicolas & Pelgrin, Florian, 2004. "Bayesian inference and state number determination for hidden Markov models: an application to the information content of the yield curve about inflation," Journal of Econometrics, Elsevier, vol. 123(2), pages 327-344, December.
  17. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
  18. Harald Grech, 2004. "What Do German Short-Term Interest Rates Tell Us About Future Inflation?," Working Papers 94, Oesterreichische Nationalbank (Austrian Central Bank).

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