This paper provides empirical evidence on the information in the term structure for longer
maturities about both future inflation and the term structure of real interest rates. The evidence
indicates that there is substantial iisformation in the longer maturity term structure about future
inflution: the slope of the term structure does have a great deal of predictive power for future
changes in inflation. On the other hand, at the longer maturities, the term structure of nominal
interest rates contains very little information about the term structure of real interest rates.
These results are strikingly different from those found for very short-term maturities, six months
or less, in previous work. For maturities of six months or less, the term structure contains no
information about the future path of inflation, but it does contain a great deal of information
about the term structure of real interest rates.
The evidence in this paper does indicate that, at longer maturities, the term structure of
interest rates can be used to help assess future inflationary pressures: when the slope of the term
structure steepens, it is an iudicstiou that the inflation rate will rise tn the future and when the
slope falls, it is an indication that the inflation rate will fall. However, we must still remain
cautious about using the evidence presented here to advocate that the Federal Reserve should
target on the term structure in conducting monetary policy. A change in Federal Reserve
operating procedures which focuses on the term itructure may well cause the relationship
between the term structure and future inflation to shift, with the resutt that the term structure
no longer remains an accurate guide to the path of future inflation. If this were to occur, Federal
Reserve monetary policy could go far astray by focusiig on the term structure of interest rates.
*Published:
The Quarterly Journal of Economics, Vol. CV, No. 442, pp. 815-828, (August 1990).
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