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On the predictive power of interest rates and interest rate spreads

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  • Ben S. Bernanke

Abstract

Economists have long understood that financial market variables contain considerable information about the future of the economy. Recently a number of researchers have pointed out that interest rates and interest rate spreads--that is, differences between interest rates on alternative financial assets--can be effective predictors of the economy. ; This finding raises a number of questions, possibly the most important being why interest rates and spreads predict the course of the economy so well. The author’s tentative conclusion is that the spread between commercial paper and Treasury bill rates has historically been a good predictor because it combines information about both monetary and nonmonetary factors ~iffecting the economy, and because it does this more accurately than alternative interest rate-based measures.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1990)
Issue (Month): Nov ()
Pages: 51-68

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Handle: RePEc:fip:fedbne:y:1990:i:nov:p:51-68

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Keywords: Interest rates ; Forecasting;

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  1. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, Elsevier, vol. 13(2-3), pages 167-171.
  2. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 129-56, January.
  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1989. "Money, Income and Prices After the 1980s," NBER Working Papers 2852, National Bureau of Economic Research, Inc.
  4. Van Horne, James C., 1979. "Behavior of default-risk premiums for corporate bonds and commercial paper," Journal of Business Research, Elsevier, Elsevier, vol. 7(4), pages 301-313, December.
  5. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, American Economic Association, vol. 62(4), pages 540-52, September.
  6. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 331-351, November.
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