IDEAS home Printed from https://ideas.repec.org/p/fip/fednrp/9717.html
   My bibliography  Save this paper

Why do interest rates predict macro outcomes?: A unified theory of inflation, output, interest and policy

Author

Listed:
  • Arturo Estrella

Abstract

Several articles published in the 1990s have identified empirical relationships between the term structure of real and nominal interest rates, on one hand, and future real output and inflation, on the other. Among these are Mishkin (1990a), Estrella and Hardouvelis (1991), Bernanke and Blinder (1992) and Fuhrer and Moore (1995). These articles demonstrate the existence of empirical predictive relationships, but the underlying economic reasons for the empirical regularities remain at least partly as puzzles. This paper presents a theoretical rational expectations model that shows how monetary policy is likely to be a key determinant of these empirical regularities.

Suggested Citation

  • Arturo Estrella, 1997. "Why do interest rates predict macro outcomes?: A unified theory of inflation, output, interest and policy," Research Paper 9717, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednrp:9717
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9717.html
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9717.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Dotsey & Christopher Otrok, 1995. "The rational expectations hypothesis of the term structure, monetary policy, and time-varying term premia," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 65-81.
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. 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.
    4. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 815-828.
    5. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
    6. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    7. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
    8. Lars E. O. Svensson, 1999. "Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
    9. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
    10. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, vol. 18(Spr), pages 50-70.
    11. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    12. Fuhrer, Jeff & Moore, George, 1992. "Monetary policy rules and the indicator properties of asset prices," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 303-336, April.
    13. Schich, Sebastian T., 1996. "Alternative specifications of the German term structure and its information content regarding inflation," Discussion Paper Series 1: Economic Studies 1996,08e, Deutsche Bundesbank.
    14. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
    15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Arturo Estrella & Jeffrey C. Fuhrer, 2002. "Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models," American Economic Review, American Economic Association, vol. 92(4), pages 1013-1028, September.
    2. Viñals, José, 2001. "Monetary Policy Issues in a Low Inflation Environment," CEPR Discussion Papers 2945, C.E.P.R. Discussion Papers.
    3. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
    4. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    5. Omay, Tolga, 2008. "The Term Structure of Interest Rate as a Predictor of Inflation and Real Economic Activity: Nonlinear Evidence from Turkey," MPRA Paper 28572, University Library of Munich, Germany.
    6. Fabio Moneta, 2005. "Does the Yield Spread Predict Recessions in the Euro Area?," International Finance, Wiley Blackwell, vol. 8(2), pages 263-301, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, July.
    2. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
    3. Hibiki Ichiue, 2004. "Why Can the Yield Curve Predict Output Growth, Inflation, and Interest Rates? An Analysis with an Affine Term Structure Model," Bank of Japan Working Paper Series 04-E-11, Bank of Japan.
    4. Yutaka Kurihara, 2016. "Term Structure of Interest Rates under Zero or Low Bound: The Recent Japanese Case," Economy, Asian Online Journal Publishing Group, vol. 3(1), pages 19-23.
    5. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    6. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    7. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
    8. Sara G. Castellanos & Eduardo Camero, 2003. "La estructura temporal de tasas de interés en México: ¿Puede predecir la actividad económica futura?," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 18(2), pages 33-66, December.
    9. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank.
    10. Peel, David A. & Ioannidis, Christos, 2003. "Empirical evidence on the relationship between the term structure of interest rates and future real output changes when there are changes in policy regimes," Economics Letters, Elsevier, vol. 78(2), pages 147-152, February.
    11. Ivanova, Detelina & Lahiri, Kajal & Seitz, Franz, 2000. "Interest rate spreads as predictors of German inflation and business cycles," International Journal of Forecasting, Elsevier, vol. 16(1), pages 39-58.
    12. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
    13. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, University Library of Munich, Germany.
    14. 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.
    15. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    16. repec:zbw:bofitp:2006_018 is not listed on IDEAS
    17. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
    18. M. Isabel Martínez-Serna & Eliseo Navarro-Arribas, 2002. "El modelo de McCallum. Evidencia empírica en la estructura temporal de los tipos de interés española," Investigaciones Economicas, Fundación SEPI, vol. 26(2), pages 323-357, May.
    19. Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.
    20. Omay, Tolga, 2008. "The Term Structure of Interest Rate as a Predictor of Inflation and Real Economic Activity: Nonlinear Evidence from Turkey," MPRA Paper 28572, University Library of Munich, Germany.
    21. Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednrp:9717. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.