Inflation Changes, Yield Spreads, and Threshold Effects
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 02-40.
Length: 29 pages Abstract: Using interest rate yield spreads to explain changes in inflation, we investigate whether such relationships can be modelled using two-regime threshold models. Implementing a robust test to detect evidence of a threshold, we find that the hypothesis of linearity is generally rejected. For the United States, we find that the inflation-spread relationship at most horizons is more pronounced when the yield curve is inverted, which is usually associated with periods of tight monetary policy. This implies that monetary policy may have an asymmetric effect on inflation. Curiously, the pattern of asymmetry in Canada appears to operate in the opposite direction, with expansionary policies having a relatively greater impact on inflation than tighter policies.
Date of creation: 2002
Date of revision:
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Inflation and prices; Interest rates;
Other versions of this item:
- Tkacz, Greg, 2004. "Inflation changes, yield spreads, and threshold effects," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 187-199.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-21 (All new papers)
- NEP-CBA-2003-04-21 (Central Banking)
- NEP-MAC-2003-04-21 (Macroeconomics)
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