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The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation

  • Jim Day
  • Ron Lange
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    This paper examines the relationship between the term structure of interest rates and future changes in inflation for Canada using a newly constructed par-value yield series. The main conclusion of the empirical work is that the slope of the nominal term structure from 1- to 5-year maturities is a reasonably good predictor of future changes in inflation over these horizons. This result is similar to that obtained for the United States and other countries. Results for models that also include competing indicators of inflation suggest that the medium-term structure of interest rates contains unique information about future inflation. Although there is additional information about future changes in inflation in M2+, commodity prices, and the output gap, this does not affect the predictive content of the medium-term structure.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-10.pdf
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    Paper provided by Bank of Canada in its series Working Papers with number 97-10.

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    Length: 37 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:bca:bocawp:97-10
    Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
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    Web page: http://www.bank-banque-canada.ca/

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    1. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
    2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    3. Richardson, Matthew & Stock, James H., 1989. "Drawing inferences from statistics based on multiyear asset returns," Journal of Financial Economics, Elsevier, vol. 25(2), pages 323-348, December.
    4. Gerlach, Stefan, 1995. "The Information Content of the Term Structure: Evidence for Germany," CEPR Discussion Papers 1264, C.E.P.R. Discussion Papers.
    5. Matthew Richardson & James H. Stock, 1990. "Drawing Inferences From Statistics Based on Multi-Year Asset Returns," NBER Working Papers 3335, National Bureau of Economic Research, Inc.
    6. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
    7. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    8. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
    9. Carleton, Willard T & Cooper, Ian A, 1976. "Estimation and Uses of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 31(4), pages 1067-83, September.
    10. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
    11. Barry Cozier & Greg Tkacz, 1994. "The Term Structure and Real Activity in Canada," Macroeconomics 9406001, EconWPA, revised 23 Jun 1994.
    12. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    13. 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.
    14. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, EconWPA.
    15. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
    16. Frank Browne & Paolo Manasse, 1989. "The Information Content of the Term Structure of Interest Rates: Theory and Practice," OECD Economics Department Working Papers 69, OECD Publishing.
    17. Kevin Clinton, 1995. "The term structure of interest rates as a leading indicator of economic activity: A technical note," Bank of Canada Review, Bank of Canada, vol. 1994(Winter), pages 23-40.
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