Interest Rate Spreads as Predictors of German Inflation and Business Cycles

38 Pages Posted: 18 May 1999

See all articles by Detelina Ivanova

Detelina Ivanova

SUNY at Albany, College of Arts and Sciences, Economics

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics

Franz Seitz

Technical University of Applied Sciences Weiden

Date Written: April 6, 1999

Abstract

We have studied the comparative performance of a number of interest rate spreads as predictors of the German inflation and business cycle in the post Bretton Woods era. The two-regime Markov switch model that we used as a nonlinear filter allows the dynamic behavior of the economy to vary between expansions and recessions in terms of duration and volatility. We found that the bank term structure, the public term structure, and the spread based on the call rate predicted all recessions with a comfortable lead, although they lagged some of the recoveries by a few months. The bank-public spread generates a series of false signals, and missed completely the upturn in the mid-seventies, but detected the last two recoveries with an average lead of nearly 12 months. The spread series based on the Lombard rate performed notably worse than the three market-based series, suggesting that the source of predictive power of interest rate spreads lies in the information they contain about an assortment of macroeconomic shocks independent of monetary policy. The filter probabilities from three of the interest rate differentials also foreshadowed the long swings in the German inflation rate remarkably well with a lead time of 2-4 years without any false signals.

JEL Classification: E3, E4, E5

Suggested Citation

Ivanova, Detelina and Lahiri, Kajal and Seitz, Franz, Interest Rate Spreads as Predictors of German Inflation and Business Cycles (April 6, 1999). Available at SSRN: https://ssrn.com/abstract=159356 or http://dx.doi.org/10.2139/ssrn.159356

Detelina Ivanova

SUNY at Albany, College of Arts and Sciences, Economics ( email )

BA 110 1400 Washington Ave.
Albany, NY 12222
United States
518-442-4759 (Phone)
518-442-4736 (Fax)

Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics ( email )

Department of Economics
1400 Washington Avenue
Albany, NY 12222
United States
518-442 4758 (Phone)
518-442 4736 (Fax)

HOME PAGE: http://www.albany.edu/~klahiri

Franz Seitz

Technical University of Applied Sciences Weiden ( email )

Hetzenrichter Weg 15
D-92637 Weiden i.d. Opf
Germany
(49) 961-382-1318 (Fax)

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