The Term Structure as a Predictor of Real Activity and Inflation in the Euro Area: A Reassessment

• Published in: Review of world economics Vol. 141; no. 2; pp. 318 - 342
• Main Authors: Cuaresma, Jesús Crespo, Gnan, Ernest, Ritzberger-Grünwald, Doris
• Format: Journal Article
• Language: English
• Published: Heidelberg Springer 01-07-2005; Springer Nature B.V
• Subjects: Central banks; Decomposition; Economic activity; Economic and Monetary Union; Economic conditions; Economic forecasting models; Economic forecasts; Economic theory; Economics; Euro; Euro Zone; Europe; Eurozone; Forecasting; Forecasting models; Global economy; Hypotheses; Industrial production; Inflation; Inflation rates; Interest rates; Modeling; Monetary economics; Monetary policy; Risk; Risk premiums; Statistical analysis; Statistical models; Term spread; Term structure; Yield curve; Yield curves; Yield to maturity
• ISSN: 1610-2878; 1610-2886
• DOI: 10.1007/s10290-005-0030-z

We study the informational content of the term structure of interest rates on future developments in inflation and real activity for the euro area, explicitly taking into account the possibility of a time-varying risk premium. We put forward a simple adjustment procedure for the term premium based on the rational expectations hypothesis of the term structure and provide evidence that the predictive content of term spreads for future developments in industrial production improves significantly if the adjusted term spread is used. The adjustment also achieves some (less systematic) improvements in the forecasting abilities of the term spread for headline inflation and core inflation.