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The information on inflation in the Australian term structure

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  • Lakshman Alles
  • Ramaprasad Bhar

Abstract

In this paper we examine the information on inflation contained in the term spread of the Australian term structure in a model in which we allow the expected real term spread to vary with time. Previously, Mishkin (1990) assumed a constant expected real term spread in a similar inflation forecasting model. We further extend the model by allowing the coefficient of the nominal yield spread also to vary with time. Results show that the model based on the time-varying expected real rate, estimated with the Kalman filter, is more suitable than the model based on the constant real rate. Also, the term spread lagged one period has more information on future inflation than the contemporaneous term. Finally, the forecasting power of a model with a randomly time-varying yield spread is inferior to the other versions examined.

Suggested Citation

  • Lakshman Alles & Ramaprasad Bhar, 1997. "The information on inflation in the Australian term structure," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 721-730.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:6:p:721-730
    DOI: 10.1080/758533865
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    References listed on IDEAS

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    1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    2. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    3. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
    4. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
    5. repec:bla:ecorec:v:64:y:1988:i:185:p:120-27 is not listed on IDEAS
    6. Frederic S. Mishkin & John Simon, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(3), pages 217-229, September.
    7. Warren J. Tease, 1988. "The Expectations Theory of the Term Structure of Interest Rates in Australia," The Economic Record, The Economic Society of Australia, vol. 64(2), pages 120-127, June.
    8. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737.
    9. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
    10. Douglas R. Kahl & Johannes Ledolter, 1983. "A Recursive Kalman Filter Forecasting Approach," Management Science, INFORMS, vol. 29(11), pages 1325-1333, November.
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    Cited by:

    1. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, vol. 86(Q III), pages 5-42.

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