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The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation

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  • Jim Day
  • Ron Lange
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    Abstract

    This paper examines the relationship between the term structure of interest rates and future changes in inflation for Canada using a newly constructed par-value yield series. The main conclusion of the empirical work is that the slope of the nominal term structure from 1- to 5-year maturities is a reasonably good predictor of future changes in inflation over these horizons. This result is similar to that obtained for the United States and other countries. Results for models that also include competing indicators of inflation suggest that the medium-term structure of interest rates contains unique information about future inflation. Although there is additional information about future changes in inflation in M2+, commodity prices, and the output gap, this does not affect the predictive content of the medium-term structure.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-10.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 97-10.

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    Length: 37 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:bca:bocawp:97-10

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    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

    Related research

    Keywords: Interest rates; Monetary and financial indicators;

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    References

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    1. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    2. Gerlach, Stefan, 1995. "The Information Content of the Term Structure: Evidence for Germany," CEPR Discussion Papers 1264, C.E.P.R. Discussion Papers.
    3. Frank Browne & Paolo Manasse, 1989. "The Information Content of the Term Structure of Interest Rates: Theory and Practice," OECD Economics Department Working Papers 69, OECD Publishing.
    4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    5. Carleton, Willard T & Cooper, Ian A, 1976. "Estimation and Uses of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 31(4), pages 1067-83, September.
    6. 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.
    7. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
    8. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
    9. Matthew Richardson & James H. Stock, 1990. "Drawing Inferences From Statistics Based on Multi-Year Asset Returns," NBER Working Papers 3335, National Bureau of Economic Research, Inc.
    10. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    11. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
    12. Barry Cozier & Greg Tkacz, . "The Term Structure and Real Activity in Canada," Working Papers 94-3, Bank of Canada.
    13. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
    14. Richardson, Matthew & Stock, James H., 1989. "Drawing inferences from statistics based on multiyear asset returns," Journal of Financial Economics, Elsevier, vol. 25(2), pages 323-348, December.
    15. Kevin Clinton, 1995. "The term structure of interest rates as a leading indicator of economic activity: A technical note," Bank of Canada Review, Bank of Canada, vol. 1994(Winter), pages 23-40.
    16. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, EconWPA.
    17. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
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    Citations

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    Cited by:
    1. Luis Eduardo Arango & Luz Adriana Flórez, . "Tramo Corto de la Curva de Rendimientos, Cambio de Régimen Inflacionario y Expectativas de Inflación en Colombia," Borradores de Economia 360, Banco de la Republica de Colombia.
    2. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, EconWPA.
    3. Fung, Ben & Mitnick, Scott & Remolona, Eli, 1999. "Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets," Working Papers 99-6, Bank of Canada.
    4. Greg Tkacz, 2002. "Inflation Changes, Yield Spreads, and Threshold Effects," Working Papers 02-40, Bank of Canada.
    5. Luis Eduardo Arango & María Angélica Arosemena, . "El Tramo Corto de la Estructura a Plazo como predictor de Expectativas de Inflación en Colombia," Borradores de Economia 264, Banco de la Republica de Colombia.
    6. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    7. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.
    8. Fernando Lefort G. & Eduardo Walker H., 2000. "The Structure of Real Interest Rates in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 3(2), pages 31-52, August.
    9. Pamela Jervis, 2007. "Inflation Compensation and Its Components in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(2), pages 27-56, August.
    10. Atta-Mensah, Joseph & Tkacz, Greg, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Working Papers 98-5, Bank of Canada.
    11. Kursat Kunter & Norbert Janssen, 2002. "Credibility Of Monetary Regimes : Is Inflation Targeting Different?," Discussion Papers 0201, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    12. Angélica Arosemena, . "Lecturas Alternativas de la Estructura a Plazo: Una Breve Revisión de literatura," Borradores de Economia 223, Banco de la Republica de Colombia.

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