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Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates

  • Christopher Ragan

    (Bank of Canada)

In this paper, the author uses the term structure of nominal interest rates to construct estimates of agents' expectations of inflation over several medium-term forecast horizons. The Expectations Hypothesis is imposed together with the assumption that expected future real interest rates are given by current real rates. Under these maintained assumptions, it is possible to compare the nominal yields on two assets of different maturities and attribute the difference in nominal yields to differences in expected inflation over the two horizons (assuming a constant term premium). The results for the United States and Canada over the past several years suggest that there is a significant static element to agents' inflation expectations. A l'aide de la structure par terme des taux d'interet nominaux, l'auteur etablit sur plusieurs horizons de prevision a moyen terme des estimations des anticipations d'inflation que forment les agents economiques. L'hypothese d'anticipations de la courbe de rendement est retenue conjointement avec celle selon laquelle les taux d'interet reels futurs anticipes sont donnes par les taux reels du moment. Sous ces deux hypotheses, il est possible de comparer les taux de rendement nominaux de deux actifs a echeances differentes et d'attribuer l'ecart entre ces taux aux divergences entre les taux d'inflation anticipes sur les deux horizons (en supposant que la prime payable a l'echeance est constante). Les resultats obtenus pour les Etats-Unis et le Canada au cours des dernieres annees laissent croire que les anticipations d'inflation des agents economiques sont en grande partie statiques.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 95-1.

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Handle: RePEc:bca:bocawp:95-1
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  1. Pesando, James E, 1978. "On the Efficiency of the Bond Market: Some Canadian Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1057-76, December.
  2. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. Frederic S. Mishkin, 1988. "The Information in the Term Structure: Some Further Results," NBER Working Papers 2575, National Bureau of Economic Research, Inc.
  5. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  6. 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," Research Paper 9122, Federal Reserve Bank of New York.
  7. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
  8. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 299-316, April.
  9. Frankel, Jeffrey A, 1982. "A Technique for Extracting a Measure of Expected Inflation from the Interest Rate Term Structure," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 135-42, February.
  10. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 59-76, January.
  11. Robert A. Amano & Tony S. Wirjanto, . "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.
  12. Robert A. Amano & Tony S. Wirjanto, . "An Empirical Investigation into Government Spending and Private Sector Behaviour," Staff Working Papers 94-8, Bank of Canada.
  13. Stephen R. Blough, 1994. "Yield curve forecasts of inflation: a cautionary tale," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-16.
  14. Hamilton, James D, 1985. "Uncovering Financial Market Expectations of Inflation," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1224-41, December.
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