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A New Framework for Yield Curve, Output and Inflation Relationships

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  • Leo Krippner

    (AMP Capital Investors)

Abstract

This article develops a theoretically-consistent and easy-to-apply framework for interpreting, investigating, and monitoring the relationships between the yield curve, output, and inflation. The framework predicts that steady-state inflation plus steady-state output growth should be cointegrated with the long-maturity level of the yield curve as estimated by a arbitrage-free version of the Nelson and Siegel (1987) model, while the shape of the yield curve model from that model should correspond to the profile (that is, the timing and magnitude) of expected future inflation and output growth. These predicted relationships are confirmed empirically using 51 years of United States data. The framework may be used for monitoring expectations of inflation and output growth implied by the yield curve. It should also provide a basis for using the yield curve to value and hedge derivatives on macroeconomic data.

Suggested Citation

  • Leo Krippner, 2005. "A New Framework for Yield Curve, Output and Inflation Relationships," Working Papers in Economics 05/07, University of Waikato.
    • Handle: RePEc:wai:econwp:05/07
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    File URL: https://repec.its.waikato.ac.nz/wai/econwp/0507.pdf
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    References listed on IDEAS

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    Cited by:

    1. Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato.

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    More about this item

    Keywords

    yield curve; term structure of interest rates; inflation; real output growth; Nelson and Siegel model; Heath-Jarrow-Morton framework;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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