IDEAS home Printed from https://ideas.repec.org/a/bla/manchs/v74y2006is1p93-115.html

The Information Content Of The Term Structure Of Interest Rates About Future Inflation—An Illustration Of The Importance Of Accounting For A Time‐Varying Real Interest Rate And Inflation Risk Premium

Author

Listed:
  • CHRISTIAN MOSE NIELSEN

Abstract

During the past 15 years a large number of studies have used the approach suggested by Mishkin (Quarterly Journal of Economics, Vol. 105 (1990), No. 3, pp. 815–828; Journal of Monetary Economics, Vol. 25 (1990), No. 1, pp. 77–95) to examine the information content of the term structure of interest rates about future inflation. The empirical results of these studies, however, are very mixed and often not supportive of the Mishkin model. In addition, many results indicate that the term structure of interest rates only contains limited information about future inflation and that the relationship between the term structure of interest rates and future inflation may not be stable over time. In this paper an extension of the Mishkin model allowing for time‐varying expected real interest rates and inflation risk premia is suggested and tested using monthly UK data from 1983:1 to 2004:10. The empirical results show that while the standard Mishkin model indicates that the term structure of interest rates contains limited information about future inflation, the extended Mishkin model indicates the contrary, i.e. the term structure of interest rates contains much information about future inflation when account is taken of time‐varying expected real interest rates and inflation risk premia—especially when the long end of the term structure of interest rates is considered. Furthermore, the results indicate a potential structural break in the relationship between the term structure of interest rates and future inflation around the time the Bank of England started targeting inflation rates.

Suggested Citation

  • Christian Mose Nielsen, 2006. "The Information Content Of The Term Structure Of Interest Rates About Future Inflation—An Illustration Of The Importance Of Accounting For A Time‐Varying Real Interest Rate And Inflation Risk Premium," Manchester School, University of Manchester, vol. 74(s1), pages 93-115, September.
    • Handle: RePEc:bla:manchs:v:74:y:2006:i:s1:p:93-115
    DOI: 10.1111/j.1467-9957.2006.00519.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1467-9957.2006.00519.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1467-9957.2006.00519.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Staff Working Papers 97-10, Bank of Canada.
    2. Francis Breedon & Jag Chadha, 1997. "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, University Library of Munich, Germany.
    2. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank, Research and Statistics Department.
    3. Christian Mose Nielsen, 2005. "The information content of the term structure of interest rates about future inflation – an illustration of the importance of accounting for a time-varying real interest rate and inflation risk premium," Money Macro and Finance (MMF) Research Group Conference 2005 86, Money Macro and Finance Research Group.
    4. Tomáš Holub & Jaromír Hurník, 2008. "Ten Years of Czech Inflation Targeting: Missed Targets and Anchored Expectations," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(6), pages 67-86, November.
    5. Siklos, Pierre L, 2000. "Inflation Targets and the Yield Curve: New Zealand and Australia versus the US," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 15-32, February.
    6. Bhundia, Ashok J. & Chadha, Jagjit S., 1998. "The information content of 3-month Sterling futures," Economics Letters, Elsevier, vol. 61(2), pages 209-214, November.
    7. Tkacz, Greg, 2004. "Inflation changes, yield spreads, and threshold effects," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 187-199.
    8. 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.
    9. Sharon Kozicki & P. A. Tinsley, 2012. "Effective Use of Survey Information in Estimating the Evolution of Expected Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 145-169, February.
    10. Joseph Atta-Mensah & Greg Tkacz, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Staff Working Papers 98-5, Bank of Canada.
    11. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    12. Luis Eduardo Arango & María Angélica Arosemena, 2003. "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.
    13. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    14. 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.
    15. Arango, Luis Eduardo & Flórez, Luz Adriana, 2008. "Tramo corto de la curva de rendimientos, cambio de régimen inflacionario y expectativas de inflación en Colombia," El Trimestre Económico, Fondo de Cultura Económica, vol. 75(297), pages 183-210, enero-mar.
    16. Greg Tkacz, 2000. "Non-Parametric and Neural Network Models of Inflation Changes," Staff Working Papers 00-7, Bank of Canada.
    17. Sharon Kozicki & P. A. Tinsley, 2006. "Survey-Based Estimates of the Term Structure of Expected U.S. Inflation," Staff Working Papers 06-46, Bank of Canada.
    18. 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.
    19. Flávio de Freitas Val & Claudio Henrique da Silveira Barbedo & Marcelo Verdini Maia, 2011. "Inflation expectation and implicit inflation: does market research provide accurate measures?," Brazilian Business Review, Fucape Business School, vol. 8(3), pages 83-100, July.
    20. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:manchs:v:74:y:2006:i:s1:p:93-115. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/semanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.