The Yield Spread as a Symmetric Predictor of Output and Inflation

47 Pages Posted: 10 Feb 2004

See all articles by Gikas A. Hardouvelis

Gikas A. Hardouvelis

University of Piraeus; Centre for Economic Policy Research (CEPR)

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

We present evidence that the predictive ability of the yield spread for short-run inflation is related to its predictive ability for economic activity. In particular, an increase in the slope of the term structure predicts an increase in output growth and a decrease in inflation of equal magnitude. In order to explain this finding, we develop a monetary asset pricing model with sticky goods prices. Sticky prices imply that economic disturbances generate predictable changes in output and inflation, thus allowing for intertemporal substitution effects and changes in the slope of the yield curve. We derive analytic solutions of the covariance between the nominal yield spread and future output growth and inflation and show that a moderate degree of price stickiness and relatively high degree of intertemporal substitution can account for the observed correlations in the U.S. data over the period 1960:Q1 - 2003:Q2.

Keywords: General equilibrium, term structure of interest rates, Consumption-CAPM, asset pricing, output, inflation

JEL Classification: E43, E44

Suggested Citation

Hardouvelis, Gikas A. and Malliaropulos, Dimitrios, The Yield Spread as a Symmetric Predictor of Output and Inflation (January 2004). Available at SSRN: https://ssrn.com/abstract=497822 or http://dx.doi.org/10.2139/ssrn.497822

Gikas A. Hardouvelis (Contact Author)

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
+32010 4142323 (Phone)
+3210 6724848 (Fax)

HOME PAGE: http://www.eurobank.gr

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
(+30) 210 3341527 (Phone)
(+30) 210 3341702 (Fax)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece
+30 1 3251133 (Fax)

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