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

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    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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    File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2004/Working-Paper-94/fullversion/wp94_tcm16-24793.pdf
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    Bibliographic Info

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

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    Date of creation: 31 Dec 2004
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    Handle: RePEc:onb:oenbwp:94

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    Keywords: inflation; interest rates;

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    22. 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.
    23. E. P. Davis & S. G. B. Henry, 1994. "The Use of Financial Spreads as Indicator Variables: Evidence for the United Kingdom and Germany," IMF Staff Papers, Palgrave Macmillan, vol. 41(3), pages 517-525, September.
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    26. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
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