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Inflation Changes, Yield Spreads, and Threshold Effects

  • Greg Tkacz

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-40.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-40.

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Length: 29 pages Abstract: Using interest rate yield spreads to explain changes in inflation, we investigate whether such relationships can be modelled using two-regime threshold models. Implementing a robust test to detect evidence of a threshold, we find that the hypothesis of linearity is generally rejected. For the United States, we find that the inflation-spread relationship at most horizons is more pronounced when the yield curve is inverted, which is usually associated with periods of tight monetary policy. This implies that monetary policy may have an asymmetric effect on inflation. Curiously, the pattern of asymmetry in Canada appears to operate in the opposite direction, with expansionary policies having a relatively greater impact on inflation than tighter policies.
Date of creation: 2002
Date of revision:
Handle: RePEc:bca:bocawp:02-40
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  9. Galbraith, John W. & Tkacz, Greg, 2000. "Testing for asymmetry in the link between the yield spread and output in the G-7 countries," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 657-672, October.
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  19. Mishkin, Frederic S., 1991. "A multi-country study of the information in the shorter maturity term structure about future inflation," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 2-22, March.
  20. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
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  23. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Working Papers 97-10, Bank of Canada.
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