The Predictive Content of the Yield Curve for In‡flation

28 Pages Posted: 24 Mar 2013

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Leonardo Iania

Université catholique de Louvain

Marco Lyrio

Insper Institute of Education and Research

Date Written: March 23, 2013

Abstract

We revisit the common practice of using yield spreads to forecast inflation. We address two main issues. First, we assess the importance of decomposing yield spreads into an expectations and a term premium component in order to predict inflation. Second, we quantify the impact of financial shocks in the dynamics of each of these components. The yield spread decomposition is achieved with the use of a no-arbitrage macro-…finance model incorporating both macroeconomic and financial factors. The model is applied to the U.S. economy and estimated with Bayesian techniques. We …find that the yield spread decomposition is crucial to forecast inflation for most forecasting horizons. Also, the inclusion of control variables such as the short-term interest rate and lagged dependent variable does not drive out the predictive power of the yield spread decomposition.

Keywords: Macro-…finance model, Term structure, In‡flation forecasting

JEL Classification: E43, E44, E47

Suggested Citation

Dewachter, Hans and Iania, Leonardo and Lyrio, Marco, The Predictive Content of the Yield Curve for In‡flation (March 23, 2013). Available at SSRN: https://ssrn.com/abstract=2238376 or http://dx.doi.org/10.2139/ssrn.2238376

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Leonardo Iania (Contact Author)

Université catholique de Louvain ( email )

34, Voie du roman pays
louvain la neuve, 1348
Belgium

HOME PAGE: http://https://sites.google.com/site/ianialeonardo/

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
76
Abstract Views
497
rank
342,360
PlumX Metrics