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The Term Structure of Interest Rates and Its Role in Monetary Policy for The European Central Bank

  • Arturo Estrella
  • Frederic S. Mishkin

This paper examines the relationship of the term structure of interest rates to monetary policy instruments and to subsequent real activity and inflation in both Europe and the United States. The results show that monetary policy is an important determinant of the term structure spread, but it unlikely to be the only determinant. In addition, there is significant predictive power for both real activity and inflation. The yield curve is thus a simple and accurate measure that should be viewed as one piece of useful information which, along with other information, can be used to help guide European monetary policy.

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File URL: http://www.nber.org/papers/w5279.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5279.

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Date of creation: Sep 1995
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Publication status: published as as "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank", European Economic Review. Volume: 41 Issue: 7 (July 1997) Pages: 1375-1401
Handle: RePEc:nbr:nberwo:5279
Note: ME
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  1. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  2. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
  3. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers 178d, Harvard - J.F. Kennedy School of Government.
  4. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  5. 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.
  6. Fernando Barran & Virginie Coudert & BenoƮt Mojon, 1995. "Interest Rates, Banking Spreads and Credit Supply: The Real Effects," Working Papers 1995-01, CEPII research center.
  7. Mark W. Watson, 1991. "Using econometric models to predict recessions," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 14-25.
  8. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
  9. E. P. Davis & S. G. B. Henry, 1994. "The Use of Financial Spreads as Indicator Variables: Evidence for the United Kingdom and Germany," IMF Staff Papers, Palgrave Macmillan, vol. 41(3), pages 517-525, September.
  10. James H. Stock & Mark W. Watson, 1992. "A procedure for predicting recessions with leading indicators: econometric issues and recent performance," Working Paper Series, Macroeconomic Issues 92-7, Federal Reserve Bank of Chicago.
  11. Robert D. Laurent, 1989. "Testing the "spread"," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 22-34.
  12. Bruce Kasman, 1992. "A comparison of monetary policy operating procedures in six industrial countries," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 5-24.
  13. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  14. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
  15. 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.
  16. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  17. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
  18. Huizinga, John & Mishkin, Frederic S., 1986. "Monetary policy regime shifts and the unusual behavior of real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 231-274, January.
  19. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  20. Frederic S. Mishkin, 1991. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc.
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