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Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ?

  • Ege, Yazgan
  • Huseyin, Kaya

This paper contributes to the vast literature on the predictive power of term structure about future inflation, by focusing on an emerging market case. The following important result emerged in our paper: Monetary policy change is an important determinant of the relationship between term structure and inflation to the extent that even the existence of the relationship critically depends on the nature of monetary policy regime. In our case, the change in monetary policy is associated with the beginning of the implementation of an inflation targeting (IT) regime. While, before IT regime, the information in term structure does not provide any predictive power for future inflation, this phenomenon seems to be completely reversed after IT. Since the implementation of IT, term structure of interest rates has seemed to gain considerable forecasting power for future inflation.

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File URL: https://mpra.ub.uni-muenchen.de/24810/1/MPRA_paper_24810.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24810.

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Date of creation: Aug 2010
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Handle: RePEc:pra:mprapa:24810
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  1. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
  2. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
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  16. Telatar, Erdinc & Telatar, Funda & Ratti, Ronald A., 2003. "On the predictive power of the term structure of interest rates for future inflation changes in the presence of political instability: the Turkish economy," Journal of Policy Modeling, Elsevier, vol. 25(9), pages 931-946, December.
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