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A Multi-Country Study of the Information in the Term Structure about Future Inflation

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  • Frederic S. Mishkin

Abstract

This paper provides evidence on what the term structure (for maturities of twelve months or less) tells us about future inflation in ten OECD countries. The empirical results on the information in the term structure contrast with those that find that the level of interest rates help forecast the future level of inflation. Instead, they indicate that for the majority of the countries in the sample, the term structure does not contain a great deal of information about the future path of inflation. The results for France, the United Kingdom and Germany tell a different story, however. In these countries, the term structure contains a highly significant amount of information about future changes in inflation. The evidence in this paper suggests that central banks for most of the countries studied here should exercise some caution in using the term structure of interest rates as a guide for assessing inflationary pressures in the economy, as is currently under consideration in the U.S. central bank. Although there is significant information in the term structure about the future path of inflation for a few of the countries, this is not a result that is true in general. The empirical evidence does reveal, however, that for every country studied except the United Kingdom, there is a great deal of information in the term structure of nominal' interest rates about the term structure of real' interest rates. This finding is an extremely useful one because it suggests that for most countries researchers can examine observable data on the nominal term structure to provide them with information about the behavior of the real' term structure.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3125.

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Date of creation: Oct 1991
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Publication status: published as "A Multi-Country Study of the Information in the Shorter Maturity Term Structure about Future Inflation." From Journal of International Money and Finance, Vol. 10, No. 1, pp. 2-22, (March 1991).
Handle: RePEc:nbr:nberwo:3125

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  1. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  3. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 478-86, June.
  4. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, American Finance Association, vol. 43(2), pages 339-56, June.
  5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  6. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 703-08, May.
  7. Huizinga, John & Mishkin, Frederic S, 1984. " Inflation and Real Interest Rates on Assets with Different Risk Characteristics," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 699-712, July.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  9. N. Gregory Mankiw & Lawrence H. Summers, 1987. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," NBER Working Papers 1345, National Bureau of Economic Research, Inc.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
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