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What Do German Short-Term Interest Rates Tell Us About Future Inflation?

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Author Info
Harald Grech () (Oesterreichische Nationalbank, Economic Studies Division)
Abstract

In this paper, the author empirically assesses the predictive power of short-term interest rates and term spreads for future inflation in Germany. Based on a multivariate term structure framework, a vector error forecasting equation for inflation forecasts of up to two years is constructed. The results of the alternative error correction reveal that the level of the shortterm interest rates conveys much more information on future inflation than the yield curve spreads. In particular, the one-month and three-month nominal interest rates seem to be informative on future inflation at a two-year horizon.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 94.

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Length: 45 pages
Date of creation: 31 Dec 2004
Date of revision:
Handle: RePEc:onb:oenbwp:94

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Keywords: inflation; 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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    Other versions:
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  18. Mishkin, Frederic S., 1990. "Does correcting for heteroscedasticity help?," Economics Letters, Elsevier, vol. 34(4), pages 351-356, December. [Downloadable!] (restricted)
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  19. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57. [Downloadable!]
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  21. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May. [Downloadable!] (restricted)
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  27. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February. [Downloadable!] (restricted)
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