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Forecasting Inflation from the Term Structure

  • Tzavalis, E.
  • Wickens, M.R.

This paper presents new evidence about the information contained in the term structure about future inflation. Although the general finding in the literature is that the greater the time horizon the more information the term structure possesses about inflation, in this paper we show that the forecasting ability of the term spread is very poor. The main finding of the paper is that the real interest rate contains far more information about future inflation that the term spread.

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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 9519.

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Length: 27 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:exe:wpaper:9519
Contact details of provider: Postal:
Streatham Court, Rennes Drive, Exeter EX4 4PU

Phone: (01392) 263218
Fax: (01392) 263242
Web page: http://business-school.exeter.ac.uk/about/departments/economics/

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  1. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
  2. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  3. 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," NBER Working Papers 3751, National Bureau of Economic Research, Inc.
  4. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
  5. 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.
  6. Tzavalis, Elias & Wickens, Micheal, 1994. "The Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence," Discussion Papers 9402, Exeter University, Department of Economics.
  7. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  8. Frederic S. Mishkin, 1988. "The Information in the Term Structure: Some Further Results," NBER Working Papers 2575, National Bureau of Economic Research, Inc.
  9. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc.
  10. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
  11. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  12. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  13. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  14. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  15. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  16. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  17. Fama, Eugene F. & Gibbons, Michael R., 1984. "A comparison of inflation forecasts," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 327-348, May.
  18. Bera, Anil K & Higgins, Matthew L & Lee, Sangkyu, 1992. "Interaction between Autocorrelation and Conditional Heteroscedasticity: A Random-Coefficient Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 133-42, April.
  19. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  20. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  21. John B. Shoven & Scott B. Smart & Joel Waldfogel, 1991. "Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium," NBER Working Papers 3754, National Bureau of Economic Research, Inc.
  22. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
  23. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  24. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  25. Benninga, Simon & Protopapadakis, Aris, 1983. "Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 856-67, October.
  26. Martin D. Evans & Karen K. Lewis, 1992. "Do Stationary Risk Premia Explain It All? Evidence from the Term Structure," Working Papers 92-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  27. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  28. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 815-828.
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