erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

The Term Structure of Interest Rates: Does It Tell About Future Inflation?

Gülbin Şahinbeyoğlu (Central Bank of the Republic of Turkey)
Cihan Yalçın (Central Bank of the Republic of Turkey)

Abstract  

Central banks of many countries have increasingly focused on the goal of price stability. In pursuing of this goal, central banks need information on the degree of inflationary pressures in the economy as well as the nature of monetary transmission mechanism. In addition to information in the monetary aggregates, the information endorsed in the financial markets has become important in understanding of monetary transmission mechanism. One of the financial indicators that can be used as a guide for monetary policy is the term structure of interest rates in bonds and bills market. In this framework, this study examines empirically what the term structure of interest rates tells us about future path of inflation in Turkey. Contrary to the expectations and previous studies carried out for OECD countries, the estimation results of this study suggest that the term structure of nominal interest rates have a significant but negative impact on the future path of inflation. This impact is weak at the very short end of data that is 3-month maturity. Highly volatile pattern of real interest rates due to imperfections in relatively undeveloped financial market and uncertainties in macroeconomic environment are the main reasons of this result. Furthermore, the fluctuations in the slope of the term structure mostly reflect the changes in the term structure of real interest rates on a one-for-one basis, in other words, the slope of the term structure of real interest rates is not constant over time.

Economic Research Center
Middle East Technical University
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e-mail: metuerc@metu.edu.tr