An indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length
It is often suggested that the slope of the term structure of interest rates contains information about the expected future path of inflation. Mishkin (1990) has recently shown that the spread between the 12-month and 3-month interest rates helps to predict the difference between the 12-month and 3-month inflation rates. His approach however, lacks a theoretical foundation, other than the (rejected) hypothesis that the real interest rate is constant. This paper applies a simple existing theoretical framework, which allows the real interest rate to vary in the short run but converge to a constant in the long run, to the problem of predicting the inflation spread. It is shown that the appropriate indicator of expected inflation can make use of the entire length of the yield curve, in particular by estimating the steepness of a specific nonlinear transformation of the curve, rather than being restricted to a spread between two points. The resulting indicator, besides having a firmer theoretical foundation does a relatively good job of predicting the inflation rate over the period 1960 to 1988.
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mishkin, F.S., 1988.
"The Information In The Term Structure: Some Further Results,"
fb-_88-26, Columbia - Graduate School of Business.
- Mishkin, Frederic S, 1988. "The Information in the Term Structure: Some Further Results," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 307-14, October-D.
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American Finance Association, vol. 44(2), pages 283-305, June.
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NBER Working Papers
3574, National Bureau of Economic Research, Inc.
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NBER Working Papers
2626, National Bureau of Economic Research, Inc.
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0088, National Bureau of Economic Research, Inc.
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Brookings Papers on Economic Activity,
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The Review of Economics and Statistics,
MIT Press, vol. 64(1), pages 135-42, February.
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- Manuel H. Johnson, 1988. "Current Perspectives on Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 253-260, Fall.
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"The Term Structure of Interest Rates,"
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2341, National Bureau of Economic Research, Inc.
- 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.
- 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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