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    The Information in Term Structure Interest Rate Spreads: The Irish Case


    Hurley, Margaret J. (1990) The Information in Term Structure Interest Rate Spreads: The Irish Case. The Economic and Social Review, 22 (1). pp. 25-34. ISSN 0012-9984

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    Abstract

    The study of the term structure of interest rates looks at how the yields on bonds vary w i t h time to maturity. Yield curves can be upward sloping, humped or downward sloping and their shape is often taken to be an indication of whether interest rates and/or inflation rates are expected to rise or fall. This forecasting potential results from the decision-making process of profitseeking investors, which must involve the formation of expectations on future inflation and interest rates. Theory suggests that, if markets are efficient, it should be possible to extract the aggregate of these expectations of inflation and interest rates from observable term structure data. I t then only requires that expectations be rational for forecasting power to be deduced. The study of the term structure is of interest to policy-makers for many reasons beyond its use as a forecasting tool. However, this paper limits itself to the study of whether interest rate spreads hold information for future interest rates and/or inflation rates, in a manner consistent with theory. In this i t draws on a long series of papers looking at using term structure to forecast interest rates (Modigliani and Shiller, 1973; Fama, 1984, 1990; Mankiw, 1986; Fama and Bliss, 1987; Hardouvelis, 1988), and also on the recent papers which have looked at the predictive power of the term structure for changes in inflation (Mishkin, 1988, 1990; Browne and Manasse, 1989). This paper examines the information in Irish yield spreads, and compares the results from Irish data w i t h the international results. The second section of the paper briefly reviews theories of the term structure, the next, following Mankiw (1986) and Mishkin (1988) shows how these theories imply that the interest rate spread w i l l have forecasting power. Sect i on IV reports and discusses results, with some comments on the data and econometric problems of the approach taken. Section V concludes.

    Item Type: Article
    Keywords: Economics; Sociology; Interest Rate spreads; Ireland;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 11411
    Depositing User: Margaret Hurley
    Date Deposited: 24 Oct 2019 15:25
    Journal or Publication Title: The Economic and Social Review
    Publisher: Tara
    Refereed: Yes
    URI:

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