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Inflation Changes, Yield Spreads, and Threshold Effects

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Greg Tkacz

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File URL: http://www.bankofcanada.ca/en/res/wp/2002/wp02-40.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-40.

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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
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Handle: RePEc:bca:bocawp:02-40

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Keywords: Inflation and prices; Interest rates;

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Find related papers by JEL classification:
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

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References listed on IDEAS
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  5. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49. [Downloadable!]
  6. Galbraith, John W. & Tkacz, Greg, 2000. "Testing for asymmetry in the link between the yield spread and output in the G-7 countries," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 657-672, October. [Downloadable!] (restricted)
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  11. Tkacz, Greg, 2000. "Non-Parametric and Neural Network Models of Inflation Changes," Working Papers 00-7, Bank of Canada. [Downloadable!]
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  14. Mishkin, Frederic S., 1991. "A multi-country study of the information in the shorter maturity term structure about future inflation," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 2-22, March. [Downloadable!] (restricted)
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  19. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September. [Downloadable!] (restricted)
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(explanations, 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. A. J. Khadaroo, 2005. "A threshold in inflation dynamics: evidence from emerging countries," Applied Economics, Taylor and Francis Journals, vol. 37(6), pages 719-723, April. [Downloadable!] (restricted)
  2. Greg Tkacz, 2007. "Gold Prices and Inflation," Working Papers 07-35, Bank of Canada. [Downloadable!]
  3. Modena, Matteo, 2008. "The term structure and the expectations hypothesis: a threshold model," MPRA Paper 9611, University Library of Munich, Germany. [Downloadable!]
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