Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ?

Ege, Yazgan and Huseyin, Kaya (2010): Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ?

Abstract

This paper contributes to the vast literature on the predictive power of term structure about future inflation, by focusing on an emerging market case. The following important result emerged in our paper: Monetary policy change is an important determinant of the relationship between term structure and inflation to the extent that even the existence of the relationship critically depends on the nature of monetary policy regime. In our case, the change in monetary policy is associated with the beginning of the implementation of an inflation targeting (IT) regime. While, before IT regime, the information in term structure does not provide any predictive power for future inflation, this phenomenon seems to be completely reversed after IT. Since the implementation of IT, term structure of interest rates has seemed to gain considerable forecasting power for future inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Term Structure of Interest Rate, Structural Break, Inflation, Monetary Policy, Inflation Targeting
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G0 - General > G00 - General

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