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Inflation Targets and the Yield Curve: New Zealand and Australia vs. the US


  • Pierre Siklos

    (Wilfred Laurier University)


This study considers whether the slope of the yield curve for New Zealand contains useful economic information. In order to provide some perspective, the present study also contrasts the New Zealnd experience with evidence based on US and Australian data. The princial findings of this study are as follows: - At short horizons, typically 2 years or less, the term structure for New Zealand behaves as in the expectations hypothesis of the term structure. - Nevertheless, there are departures from the expectations hypothesis, especially in the period when inflation objectives in New Zealand were on a declining path. Moreover, the policies of the US had a critically important impact around 1993-94. - Some evidence was found of an effect from the spread to future inflation but only when the headline CPI is used to measure inflation; the links disappear entirely once CPI ex credit costs are employed. The study argues that such results are consistent with a credible inflation targeting regime so that term structure serves possibly to signal changes in real interest rates rather than inflation in New Zealand. - There is good evidence that the spread helps predict future output in New Zealand, although the effect seems to dissipate after one year. once we distinguish between periods of positive versus negative growth rates in real GDP, the spread influences output up to two years into the future. Also, when output growth is measured asymmetrically, rising inflation expectations depress output growth.

Suggested Citation

  • Pierre Siklos, 1999. "Inflation Targets and the Yield Curve: New Zealand and Australia vs. the US," Research Paper Series 25, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:25

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    References listed on IDEAS

    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    2. Yoosef Maghsoodi, 1996. "Solution Of The Extended Cir Term Structure And Bond Option Valuation," Mathematical Finance, Wiley Blackwell, vol. 6(1), pages 89-109.
    3. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    5. Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-209, March.
    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Schloegl, Erik & Lutz Schloegl, 1997. "A Tractable Term Structure Model with Endogenous Interpolation and Positive Interest Rates," Discussion Paper Serie B 396, University of Bonn, Germany.
    8. F. Jamshidian, 1995. "A simple class of square-root interest-rate models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(1), pages 61-72.
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    Cited by:

    1. Alfred A. Haug & Pierre L. Siklos, 2002. "The Term Spread International Evidence of Non-Linear Adjustment," Working Papers 2002_08, York University, Department of Economics, revised Jul 2004.
    2. Manai Daboussi, Olfa, 2014. "Inflation Targeting As a Monetary Policy Rule: Experience and Prospects," MPRA Paper 59336, University Library of Munich, Germany, revised 14 Oct 2014.
    3. Olfa Manai Daboussi, 2016. "Enhanced Economic Stability and the Role of Inflation Targeting Policy: Empirical Study on Case of Developing Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(6), pages 352-362, June.
    4. Mohammed SAIFUL ISLAM & Mohammad Taslim UDDIN, 2011. "Inflation Targeting as the Monetary Policy Framework: Bangladesh Perspective," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 14(1), pages 106-119, June.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models


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