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An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length

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Author Info
Frankel, Jeffrey A
Lown, Cara S

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Abstract

The term-structure slope contains information about expected future inflation. Frederic Mishkin shows that the spread between the twelve-month and three-month interest rate helps predict the difference between twelve-month and three-month inflation. The authors apply a simple existing framework, which lets the real interest rate vary in the short run but converge to a constant in the long run, to this problem. The appropriate indicator of expected inflation uses the entire length of the yield curve, estimating the steepness of a specific nonlinear transformation, rather than being restricted to a spread between two points. The resulting indicator better predicts inflation over 1960-91. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 109 (1994)
Issue (Month): 2 (May)
Pages: 517-30
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Handle: RePEc:tpr:qjecon:v:109:y:1994:i:2:p:517-30

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. N. Gregory Mankiw & Lawrence H. Summers, 1984. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1984-1), pages 223-248. [Downloadable!]
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  2. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Mishkin, F.S., 1988. "The Information In The Term Structure: Some Further Results," Papers fb-_88-26, Columbia - Graduate School of Business.
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  4. Mishkin, Frederic S., 1990. "Does correcting for heteroscedasticity help?," Economics Letters, Elsevier, vol. 34(4), pages 351-356, December. [Downloadable!] (restricted)
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  5. Frederic S. Mishkin, 1990. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(2), pages 283-305, June. [Downloadable!] (restricted)
  7. Mishkin, Frederic S, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 815-28, August. [Downloadable!] (restricted)
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  8. Robert J. Shiller & J. Huston McCulloch, 1987. "The Term Structure of Interest Rates," NBER Working Papers 2341, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Frankel, Jeffrey A, 1982. "A Technique for Extracting a Measure of Expected Inflation from the Interest Rate Term Structure," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 135-42, February. [Downloadable!] (restricted)
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  10. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June. [Downloadable!] (restricted)
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