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Forecasting inflation from the term structure

  • Tzavalis, Elias
  • Wickens, M. R.

This paper presents new evidence about the information contained in the term structure about future inflation. Although the general finding in the literature is that the greater the time horizon the more information the term structure possesses about inflation, in this paper we show that the forecasting ability of the term spread is very poor. The main finding of the paper is that the real interest rate contains far more information about future inflation that the term spread.

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File URL: http://www.sciencedirect.com/science/article/B6VFG-3VV58VG-3/2/d63b14e8bad59926ad46dc464400f484
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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 3 (1996)
Issue (Month): 1 (May)
Pages: 103-122

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Handle: RePEc:eee:empfin:v:3:y:1996:i:1:p:103-122
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
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  3. Jeffrey A. Frankel & Cara S. Lown, 1991. "An Indicator of Future Inflation Extracted From the Steepness of the Interest Rate Yield Curve Along Its Entire Length," NBER Working Papers 3751, National Bureau of Economic Research, Inc.
  4. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
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  6. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
  7. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
  8. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
  9. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  10. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  11. 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, vol. 88(5), pages 829-53, October.
  12. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  13. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
  14. Benninga, Simon & Protopapadakis, Aris, 1983. "Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 856-67, October.
  15. Mishkin, Frederic S, 1988. "The Information in the Term Structure: Some Further Results," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 307-14, October-D.
  16. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  17. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
  18. Fama, Eugene F. & Gibbons, Michael R., 1984. "A comparison of inflation forecasts," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 327-348, May.
  19. Elias Tzavalis & Michael Wickens, . "The Rational Expectations Hypothesis of the Term Structure: reconciling the evidence," Discussion Papers 95/33, Department of Economics, University of York.
  20. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  21. Bera, Anil K & Higgins, Matthew L & Lee, Sangkyu, 1992. "Interaction between Autocorrelation and Conditional Heteroscedasticity: A Random-Coefficient Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 133-42, April.
  22. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  23. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 285-318, April.
  24. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  25. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
  26. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June.
  27. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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