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
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: |
|
| Use Licence: |
This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available
here |
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