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

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  • Jim Day
  • Ron Lange

Abstract

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.

Suggested Citation

  • Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Staff Working Papers 97-10, Bank of Canada.
  • Handle: RePEc:bca:bocawp:97-10
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    Cited by:

    1. repec:eee:reveco:v:57:y:2018:i:c:p:164-182 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    5. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    6. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank.
    7. 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. 0(297), pages 183-210, enero-mar.
    8. Luis Eduardo Arango & María Angélica Arosemena, 2003. "El Tramo Corto de la Estructura a Plazo como predictor de Expectativas de Inflación en Colombia," Borradores de Economia 264, Banco de la Republica de Colombia.
    9. Greg Tkacz, 2000. "Non-Parametric and Neural Network Models of Inflation Changes," Staff Working Papers 00-7, Bank of Canada.
    10. Joseph Atta-Mensah & Greg Tkacz, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Staff Working Papers 98-5, Bank of Canada.
    11. Siklos, Pierre L, 2000. "Inflation Targets and the Yield Curve: New Zealand and Australia versus the US," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 15-32, February.
    12. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, University Library of Munich, Germany.
    13. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    14. Ben Fung & Scott Mitnick & Eli Remolona, 1999. "Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets," Staff Working Papers 99-6, Bank of Canada.
    15. Fernando Lefort G. & Eduardo Walker H., 2000. "The Structure of Real Interest Rates in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 3(2), pages 31-52, August.
    16. Tkacz, Greg, 2004. "Inflation changes, yield spreads, and threshold effects," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 187-199.
    17. Kursat Kunter & Norbert Janssen, 2002. "Credibility Of Monetary Regimes : Is Inflation Targeting Different?," Discussion Papers 0201, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    18. Christian Mose Nielsen, 2006. "The Information Content Of The Term Structure Of Interest Rates About Future Inflation—An Illustration Of The Importance Of Accounting For A Time‐Varying Real Interest Rate And Inflation Risk Premium," Manchester School, University of Manchester, vol. 74(s1), pages 93-115, September.
    19. Pamela Jervis, 2007. "Inflation Compensation and Its Components in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(2), pages 27-56, August.

    More about this item

    Keywords

    Interest rates; Monetary and financial indicators;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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