THE PREDICTIVE POWER OF YIELD SPREADS FOR FUTURE INTEREST-RATES - EVIDENCE FROM THE DANISH TERM STRUCTURE

The predictive power of yield spreads for future interest rates is exa mined using a new database of zero-coupon bonds yields from the Danish bond market. The evidence shows that during the period of monetary ta rgeting, 1976:1-1985:7, yield spreads have substantial predictive powe r, and the results tend to support the rational expectations version o f the classical expectations theory of the term structure. However, fo r the recent period 1985:8-1991:12, characterized by a shift to a poli cy of interest rate targeting, the predictive power of yield spreads d isappears.