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Why Can the Yield Curve Predict Output Growth, Inflation, and Interest Rates? An Analysis with Affine Term Structure Model

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  • Hibiki Ichiue

Abstract

The literature gives evidence that term spreads help predict output growth, inflation, and interest rates. This paper integrates and explains these predictability results by using an affine term structure model with observable macroeconomic factors. The results suggest that consumers are willing to pay a higher premium for output growth risk hedge during the higher inflation regime. This causes term spreads to react to recent inflation shocks, which prove useful for prediction. We also find that term spreads using the short end of the yield curve have less predictive power than many other spreads. We attribute this to monetary policy inertia

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 581.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:581

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Keywords: Term Structure; Monetary Policy; VAR;

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References

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Cited by:
  1. Kurita, Takamitsu, 2010. "Empirical modeling of Japan's markup and inflation, 1976-2000," Journal of Asian Economics, Elsevier, vol. 21(6), pages 552-563, December.
  2. Kurita, Takamitsu, 2011. "An empirical model for Japan's business fixed investment," Journal of Economics and Business, Elsevier, vol. 63(2), pages 107-120, March.
  3. Junko Koeda, 2010. "How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited," CARF F-Series CARF-F-237, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2011.

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