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Forecasting inflation from the term structure

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  • Tzavalis, Elias
  • Wickens, M. R.

Abstract

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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Suggested Citation

  • Tzavalis, Elias & Wickens, M. R., 1996. "Forecasting inflation from the term structure," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 103-122, May.
  • Handle: RePEc:eee:empfin:v:3:y:1996:i:1:p:103-122
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
    2. Francisco Alonso-Sánchez & Juan Ayuso-Huertas & Jorge Martínez-Pagés, 2000. "El contenido informativo de los tipos de interés sobre la tasa de inflación española," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 455-471, May.
    3. Palle S. Andersen, 1997. "Forecast errors and financial developments," BIS Working Papers 51, Bank for International Settlements.
    4. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-380, August.
    5. Browne, Frank & Everett, Mary, 2006. "The Real Interest Rate Spread as a Monetary Policy Indicator," Research Technical Papers 6/RT/06, Central Bank of Ireland.
    6. Kai Carstensen & Julia Hawellek, 2003. "Forecasting inflation from the term structure," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 139(2), pages 306-323, June.
    7. Chopin, Nicolas & Pelgrin, Florian, 2004. "Bayesian inference and state number determination for hidden Markov models: an application to the information content of the yield curve about inflation," Journal of Econometrics, Elsevier, vol. 123(2), pages 327-344, December.
    8. Pons Novell, J., 2002. "Ciclo de la economía española y contenido informativo de los tipos de interés," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 20, pages 583-598, Diciembre.
    9. Jesús Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Grünwald, 2005. "The term structure as a predictor of real activity and inflation in the euro area: a reassessment," BIS Papers chapters,in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 177-92 Bank for International Settlements.
    10. repec:spo:wpecon:info:hdl:2441/2129 is not listed on IDEAS
    11. Martin D. D. Evans, 2003. "Real risk, inflation risk, and the term structure," Economic Journal, Royal Economic Society, vol. 113(487), pages 345-389, April.
    12. Lee, Jin, 2005. "Estimating memory parameter in the US inflation rate," Economics Letters, Elsevier, vol. 87(2), pages 207-210, May.
    13. Harald Grech, 2004. "What Do German Short-Term Interest Rates Tell Us About Future Inflation?," Working Papers 94, Oesterreichische Nationalbank (Austrian Central Bank).
    14. Kai Carstensen, 2006. "Estimating the ECB Policy Reaction Function," German Economic Review, Verein für Socialpolitik, vol. 7, pages 1-34, February.
    15. Matthieu Lemoine & Florian Pelgrin, 2003. "Introduction aux modèles espace-état et au filtre de Kalman," Revue de l'OFCE, Presses de Sciences-Po, vol. 86(3), pages 203-229.
    16. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.
    17. M. Isabel Martínez-Serna & Eliseo Navarro-Arribas, 2002. "El modelo de McCallum. Evidencia empírica en la estructura temporal de los tipos de interés española," Investigaciones Economicas, Fundación SEPI, vol. 26(2), pages 323-357, May.
    18. George M. von Furstenberg & Michael T. Gapen, 1998. "Conditional Indexation Bias in Yields Reported on Inflation-Indexed Securities with Special Reference to UDIBONOS and TIPS," Economía Mexicana NUEVA ÉPOCA, , vol. 0(2), pages 149-188, July-Dece.
    19. Sanchez-Fung Jose R., 2003. "Monetary Policy Reaction Dynamics In A Developing Economy: Evidence For The Dominican Republic," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(1).
    20. Param Silvapulle & Ramya Hewarathna, 2002. "Robust estimation and inflation forecasting," Applied Economics, Taylor & Francis Journals, vol. 34(18), pages 2277-2282.
    21. Andrea Beccarini, 2007. "Investment sensitivity to interest rates in an uncertain context: is a positive relationship possible?," Economic Change and Restructuring, Springer, vol. 40(3), pages 223-234, September.
    22. repec:eee:jebusi:v:92:y:2017:i:c:p:45-62 is not listed on IDEAS
    23. Faria, Joao Ricardo & Mollick, Andre Varella, 2004. "The nominal theory of interest under habit formation: evidence for the U.S., 1959-2002," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 333-354, December.
    24. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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