### Abstract

Original language | English |
---|---|

Place of Publication | Tilburg |

Publisher | Macroeconomics |

Number of pages | 23 |

Volume | 1998-85 |

Publication status | Published - 1998 |

### Publication series

Name | CentER Discussion Paper |
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Volume | 1998-85 |

### Fingerprint

### Keywords

- term structure of interest rates
- inflation targets

### Cite this

*The Term Structure of Interest Rates and Inflation Forecast Targeting*. (CentER Discussion Paper; Vol. 1998-85). Tilburg: Macroeconomics.

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**The Term Structure of Interest Rates and Inflation Forecast Targeting.** / Eijffinger, S.C.W.; Schaling, E.; Verhagen, W.H.

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - The Term Structure of Interest Rates and Inflation Forecast Targeting

AU - Eijffinger, S.C.W.

AU - Schaling, E.

AU - Verhagen, W.H.

N1 - Pagination: 23

PY - 1998

Y1 - 1998

N2 - This paper examines the implications of the expectations theory of the term structure for the implementation of inflation targeting. We show that the term structure weakens the transmission of short term interest rates to ultimate policy objectives. Therefore, short term interest rates in the central bank's forward looking monetary policy rule need to respond more strongly to the output gap and deviations of inflation from its target. Thus, in general the term structure implies a higher degree of policy activism. Next, we show that both the sensitivity of the term spread to economic fundamentals, and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. If the central bank becomes relatively less concerned about inflation stabilisation the term spread becomes less sensitive to fundamentals, and the spread will be less successful in predicting real economic activity.

AB - This paper examines the implications of the expectations theory of the term structure for the implementation of inflation targeting. We show that the term structure weakens the transmission of short term interest rates to ultimate policy objectives. Therefore, short term interest rates in the central bank's forward looking monetary policy rule need to respond more strongly to the output gap and deviations of inflation from its target. Thus, in general the term structure implies a higher degree of policy activism. Next, we show that both the sensitivity of the term spread to economic fundamentals, and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. If the central bank becomes relatively less concerned about inflation stabilisation the term spread becomes less sensitive to fundamentals, and the spread will be less successful in predicting real economic activity.

KW - term structure of interest rates

KW - inflation targets

M3 - Discussion paper

VL - 1998-85

T3 - CentER Discussion Paper

BT - The Term Structure of Interest Rates and Inflation Forecast Targeting

PB - Macroeconomics

CY - Tilburg

ER -