The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure

31 Pages Posted: 12 Nov 2002

See all articles by Martin T. Bohl

Martin T. Bohl

University of Muenster

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

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Date Written: September 2002

Abstract

In this paper we analyse the influence of the Bundesbank's inflation targeting policy on the behavior of the spread between long-term and short-term German interest rates. The term spread is considered to be a key indicator of future inflation and economic activity. The application of a momentum threshold autoregressive cointegration model enables us to study the adjustment process of the spread toward equilibrium in greater detail than heretofore possible and permits relaxation of the linear and symmetric adjustment assumption underlying conventional cointegration and error correction investigations on the expectations hypothesis. The empirical findings are consistent with the hypothesized asymmetric adjustment behavior of the spread and can be explained by the Bundesbank's inflation targeting policy during the period from 1975 to 1998.

Keywords: Term Structure, Threshold Cointegration, Asymmetric Adjustment, Inflation Targeting Policy of the Bundesbank

JEL Classification: E43, C22, C50

Suggested Citation

Bohl, Martin T. and Siklos, Pierre L., The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure (September 2002). Available at SSRN: https://ssrn.com/abstract=338600 or http://dx.doi.org/10.2139/ssrn.338600

Martin T. Bohl

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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