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Forecasting inflation from the term structure

Author

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  • Kai Carstensen
  • Julia Hawellek

Abstract

In this paper the authors analyze the forecasting ability of the term structure with respect to future inflation in Germany. In contrast to previous studies, they find evidence in favor of a nonstationary term premium. Assuming that the nonstationary part of the term premium can be approximated by an observable factor, they derive testable restrictions which cannot be rejected for German data. In an out-of-sample forecasting experiment, the model out-performs rival models which assume a constant term premium. Nevertheless, the authors find that the forecasting ability of the term structure is limited while the real interest rate is revealed as a good predictor for future inflation rates.
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Suggested Citation

  • Kai Carstensen & Julia Hawellek, 2003. "Forecasting inflation from the term structure," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 139(2), pages 306-323, June.
    • Handle: RePEc:spr:weltar:v:139:y:2003:i:2:p:306-323
    DOI: 10.1007/BF02659747
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    References listed on IDEAS

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    1. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
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    6. repec:cup:etheor:v:11:y:1995:i:2:p:331-46 is not listed on IDEAS
    7. Seo, Byeongseon, 1999. "Distribution theory for unit root tests with conditional heteroskedasticity1," Journal of Econometrics, Elsevier, vol. 91(1), pages 113-144, July.
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    Cited by:

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    2. Riza Demirer & Rangan Gupta & Asli Yuksel & Aydin Yuksel, 2020. "The US Term Structure and Return Volatility in Global REIT Markets," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(3), pages 84-109, September.
    3. Jesús Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Grünwald, 2005. "The term structure as a predictor of real activity and inflation in the euro area: a reassessment," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 177-92, Bank for International Settlements.
    4. Demirer, Rıza & Ferrer, Román & Shahzad, Syed Jawad Hussain, 2020. "Oil price shocks, global financial markets and their connectedness," Energy Economics, Elsevier, vol. 88(C).
    5. Li, Matthew C., 2016. "US term structure and international stock market volatility: The role of the expectations factor and the maturity premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 1-15.
    6. Umar, Zaghum & Abrar, Afsheen & Hadhri, Sinda & Sokolova, Tatiana, 2023. "The connectedness of oil shocks, green bonds, sukuks and conventional bonds," Energy Economics, Elsevier, vol. 119(C).
    7. Riza Demirer & Rangan Gupta & Asli Yuksel & Aydin Yuksel, 2020. "The US Term Structure and Return Volatility in Global REIT Markets," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(3), pages 84-109, September.
    8. Riza Demirer & Asli Yuksel & Aydin Yuksel, 2020. "The U.S. term structure and return volatility in emerging stock markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(4), pages 687-707, October.

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