An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve Along Its Entire Length

Jeffrey Frankel and Cara S. Lown

The Quarterly Journal of Economics, 1994, vol. 109, issue 2, 517-530

Abstract: The term-structure slope contains information about expected future inflation. Mishkin shows that the spread between the twelve-month and three-month interest rates helps predict the difference between twelve-month and three-month inflation. We apply a simple existing framework, which lets the real interest rate vary in the short run but converge to a constant in the long run, to this problem. The appropriate indicator of expected inflation uses the entire length of the yield curve, estimating the steepness of a specific nonlinear transformation, rather than being restricted to a spread between two points. The resulting indicator better predicts inflation, over 1960–1991.

Date: 1994
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Working Paper: An indicator of future inflation extracted from the steepness of the interest rate yield curve along its entire length (1991)
Working Paper: An Indicator of Future Inflation Extracted From the Steepness of the Interest Rate Yield Curve Along Its Entire Length (1991)
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