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Inflation Changes, Yield Spreads, and Threshold Effects

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  • Greg Tkacz

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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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References

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  1. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Working Papers 97-10, Bank of Canada.
  2. John W. Galbraith & Greg Tkacz, 1999. "Testing For Asymmetry In The Link Between The Yield Spread And Output In The G-7 Countries," Departmental Working Papers 1999-02, McGill University, Department of Economics.
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  16. Tkacz, Greg, 2000. "Non-Parametric and Neural Network Models of Inflation Changes," Working Papers 00-7, Bank of Canada.
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Cited by:
  1. Thi Kim Cuc Nguyen & Reza Yamora Siregar, 2013. "Inflationary Implication of Gold Price in Vietnam," CAMA Working Papers 2013-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. A. J. Khadaroo, 2005. "A threshold in inflation dynamics: evidence from emerging countries," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 719-723.
  3. Greg Tkacz, 2007. "Gold Prices and Inflation," Working Papers 07-35, Bank of Canada.
  4. Ege, Yazgan & Huseyin, Kaya, 2010. "Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ?," MPRA Paper 24810, University Library of Munich, Germany.
  5. Modena, Matteo, 2008. "The term structure and the expectations hypothesis: a threshold model," MPRA Paper 9611, University Library of Munich, Germany.

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