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Information Content in the Term Structure of Money Market Interest Rates on Future Inflation: The Case of Finland

Posted: 17 Sep 1998  

Juha-Pekka Junttila

Jyväskylä University School of Business and Economics; Oulu Business Scool

Date Written: May 1998

Abstract

Using a Markov-switching regime change model applied to Finnish money market interest spreads we find that unobserved changes from tightening to loosening monetary policy are important when examining the explanatory power of interest rates on future inflation changes. The unobserved regime changes are revealed ex ante (3 - 4 months ahead) with respect to observed changes in a recently introduced measure for the stance of monetary policy, i.e. the Monetary Conditions Index (MCI). Implementing the derived monetary policy regime changes to the analysis does not increase the forecasting power of interest rate spreads on future inflation changes, but the monetary policy regime itself explains changes in the future inflation rates strongly.

JEL Classification: C22, E31, E42, E43

Suggested Citation

Junttila, Juha-Pekka, Information Content in the Term Structure of Money Market Interest Rates on Future Inflation: The Case of Finland (May 1998). Available at SSRN: https://ssrn.com/abstract=124569

Juha-Pekka Junttila (Contact Author)

Jyväskylä University School of Business and Economics ( email )

University of Jyväskylä
PO Box 35
Jyväskylä, FIN-40014
Finland

Oulu Business Scool ( email )

PO Box 4600
FIN-90014 University of Oulu
Finland
+358-8-553 2916 (Phone)
+358-8-553 2906 (Fax)

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