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The information content of the German term structure regarding inflation

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  • Sebastian Schich

Abstract

The paper investigates the information content of the German term structure regarding inflation, defined as the ability of the yield curve's slope to predict future changes in inflation rates. The empirical tests show that the German yield curve is informative in that sense, especially in its middle segment between three and eight years. A new robustness test is considered. Besides the specification in terms of yields-to-maturity, which has traditionally been employed by the Bundesbank and by previous empirical research, zero-coupon rates (are considered) estimated using the Svensson (IMF Working Paper No. 114, 1994) approach. This takes account of the fact that tests of the expectations hypothesis are in fact tests of joint hypotheses, among them, that the yield curve specification used gives an unbiased picture of the relevant information and that the specific formulation of the expectations hypothesis is valid. Despite the considerable differences between the two yield curve specifications, the results regarding the information content are overall robust with respect to the choice of the specification.

Suggested Citation

  • Sebastian Schich, 1999. "The information content of the German term structure regarding inflation," Applied Financial Economics, Taylor & Francis Journals, vol. 9(4), pages 385-395.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:4:p:385-395
    DOI: 10.1080/096031099332276
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    1. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
    2. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
    3. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, Centre for Economic Policy Research.
    4. Schich, Sebastian T., 1997. "Estimating the German term structure," Discussion Paper Series 1: Economic Studies 1997,04e, Deutsche Bundesbank.
    5. Schich, Sebastian T., 1996. "Alternative specifications of the German term structure and its information content regarding inflation," Discussion Paper Series 1: Economic Studies 1996,08e, Deutsche Bundesbank.
    6. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
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    Cited by:

    1. Luis Eduardo Arango & Luis Fernando Melo & Diego Mauricio V�squez, 2003. "Estimación de la estructura a plazo de las tasas de interés en Colombia," Coyuntura Económica, Fedesarrollo, vol. 33(1), pages 51-76.
    2. Manqoba Ntshakala & Laurence Harris, 2018. "The information content of the yield spread about future inflation in South Africa," WIDER Working Paper Series wp-2018-63, World Institute for Development Economic Research (UNU-WIDER).
    3. Harald Grech, 2004. "What Do German Short-Term Interest Rates Tell Us About Future Inflation?," Working Papers 94, Oesterreichische Nationalbank (Austrian Central Bank).
    4. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 11, European Central Bank.
    5. Telatar, Erdinc & Telatar, Funda & Ratti, Ronald A., 2003. "On the predictive power of the term structure of interest rates for future inflation changes in the presence of political instability: the Turkish economy," Journal of Policy Modeling, Elsevier, vol. 25(9), pages 931-946, December.
    6. Holmes, Mark J. & Maghrebi, Nabil, 2008. "Is there a connection between monetary unification and real economic integration? Evidence from regime-switching stationarity tests," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 958-970, October.
    7. Holmes, Mark J., 2002. "Does long-run real interest parity hold among EU countries? Some new panel data evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 733-746.
    8. Holmes, Mark J. & Dutu, Richard & Cui, Xiaoman, 2009. "Real interest rates, inflation and the open economy: A regime-switching perspective on Australia and New Zealand," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 351-360, March.
    9. Leo Krippner, 2005. "Investigating the Relationships between the Yield Curve, Output and Inflation using an Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models," Working Papers in Economics 05/02, University of Waikato.
    10. Mark J. Holmes & Ping Wang, 2008. "Real Convergence and the EU Accession Countries," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(3), pages 215-236, December.
    11. Luis Eduardo Arango & Luis Fernando Melo, 2002. "Estimaci�n de la Estructura a Plazo de las Tasas de Inter�s en Colombia," Borradores de Economia 2594, Banco de la Republica.
    12. repec:onb:oenbwp:y::i:94:b:1 is not listed on IDEAS
    13. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
    14. Angélica Arosemena, 2002. "Lecturas Alternativas de la Estructura a Plazo: Una Breve Revisión de literatura," Borradores de Economia 223, Banco de la Republica de Colombia.
    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. Laurence Harris & Manqoba Ntshakala, 2018. "The information content of the yield spread about future inflation in South Africa," WIDER Working Paper Series 63, World Institute for Development Economic Research (UNU-WIDER).
    17. Mark J. Holmes & Ping Wang, 2008. "Real Convergence and Regime-Switching Among EU Accession Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 6(1), pages 9-27.

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