The Yield Spread as a Symmetric Predictor of Output and Inflation
Gikas Hardouvelis () and
Authors registered in the RePEc Author Service: Dimitrios Malliaropulos ()
No 4314, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We present evidence that the predictive ability of the yield spread for short-run inflation is related to its predictive ability for economic activity. In particular, an increase in the slope of the term structure predicts an increase in output growth and a decrease in inflation of equal magnitude. In order to explain this finding, we develop a monetary asset-pricing model with sticky goods prices. Sticky prices imply that economic disturbances generate predictable changes in output and inflation, thus allowing for intertemporal substitution effects and changes in the slope of the yield curve. We derive analytic solutions of the covariance between the nominal yield spread and future output growth and inflation and show that a moderate degree of price stickiness and relatively high degree of intertemporal substitution can account for the observed correlations in the US data over the period 1960:Q1 - 2003:Q2.
Keywords: general equilibrium; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4314
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=4314
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().