AN INDICATOR OF FUTURE INFLATION EXTRACTED FROM THE STEEPNESS OF THE INTEREST-RATE YIELD CURVE ALONG ITS ENTIRE LENGTH

The term-structure slope contains information about expected future in flation. Mishkin shows that the spread between the twelve-month and th ree-month interest rates helps predict the difference between twelve-m onth and three-month inflation. We apply a simple existing framework, which lets the real interest rate vary in the short run but converge t o a constant in the long run, to this problem. The appropriate indicat or of expected inflation uses the entire length of the yield curve, es timating the steepness of a specific nonlinear transformation, rather than being restricted to a spread between two points. The resulting in dicator better predicts inflation, over 1960-1991.