A New Framework for Yield Curve, Output and Inflation Relationships

Leo Krippner

Working Papers in Economics from University of Waikato

Abstract: This article develops a theoretically-consistent and easy-to-apply framework for interpreting, investigating, and monitoring the relationships between the yield curve, output, and inflation. The framework predicts that steady-state inflation plus steady-state output growth should be cointegrated with the long-maturity level of the yield curve as estimated by a arbitrage-free version of the Nelson and Siegel (1987) model, while the shape of the yield curve model from that model should correspond to the profile (that is, the timing and magnitude) of expected future inflation and output growth. These predicted relationships are confirmed empirically using 51 years of United States data. The framework may be used for monitoring expectations of inflation and output growth implied by the yield curve. It should also provide a basis for using the yield curve to value and hedge derivatives on macroeconomic data.

Keywords: yield curve; term structure of interest rates; inflation; real output growth; Nelson and Siegel model; Heath-Jarrow-Morton framework (search for similar items in EconPapers)
JEL-codes: E31 E32 E43 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2005-12-08
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wai:econwp:05/07

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