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What Do German Short-Term Interest Rates Tell Us About Future Inflation?

In this paper, the author empirically assesses the predictive power of short-term interest rates and term spreads for future inflation in Germany. Based on a multivariate term structure framework, a vector error forecasting equation for inflation forecasts of up to two years is constructed. The results of the alternative error correction reveal that the level of the shortterm interest rates conveys much more information on future inflation than the yield curve spreads. In particular, the one-month and three-month nominal interest rates seem to be informative on future inflation at a two-year horizon.

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File URL: https://www.oenb.at/dam/jcr:fbe16ad9-2628-4885-a2df-9bfeaf409544/wp94_tcm16-24793.pdf
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 94.

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Length: 45
Date of creation: 31 Dec 2004
Date of revision:
Handle: RePEc:onb:oenbwp:94
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  6. Neiss, Katharine & Nelson, Edward, 2001. "The Real Interest rate Gap as an Inflation Indicator," CEPR Discussion Papers 2848, C.E.P.R. Discussion Papers.
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  9. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  10. Mishkin, F.S., 1988. "The Information In The Term Structure: Some Further Results," Papers fb-_88-26, Columbia - Graduate School of Business.
  11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  12. Estrella, Arturo & Mishkin, Frederic S., 1997. "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, Elsevier, vol. 41(7), pages 1375-1401, July.
  13. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
  14. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area?," CEPR Discussion Papers 3146, C.E.P.R. Discussion Papers.
  15. 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.
  16. Sharon Kozicki, 1998. "Predicting inflation with the term structure spread," Research Working Paper 98-02, Federal Reserve Bank of Kansas City.
  17. Sebastian Schich, 1999. "The information content of the German term structure regarding inflation," Applied Financial Economics, Taylor & Francis Journals, vol. 9(4), pages 385-395.
  18. Gerlach, Stefan, 1997. "The Information Content of the Term Structure: Evidence for Germany," Empirical Economics, Springer, vol. 22(2), pages 161-79.
  19. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  20. Tzavalis, E. & Wickens, M.R., 1995. "Forecasting Inflation from the Term Structure," Discussion Papers 9519, Exeter University, Department of Economics.
  21. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
  22. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-14, Nov.-Dec..
  23. Frederic S. Mishkin, 1989. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc.
  24. Frederic S. Mishkin, 1991. "Does Correcting for Heteroskedasticity Help?," NBER Technical Working Papers 0088, National Bureau of Economic Research, Inc.
  25. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
  26. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  27. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  28. 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.
  29. Frederic S. Mishkin, 1990. "Yield Curve," NBER Working Papers 3550, National Bureau of Economic Research, Inc.
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