THE INFORMATION-CONTENT OF THE YIELD CURVE FOR MONETARY-POLICY - A SURVEY

The information content of the yield curve with respect to future infl ation as well as future real economic activity is discussed. Both theo retical arguments and the empirical validity of these arguments are re viewed. The empirics favouring the yield curve as leading indicator fo r inflation is nor found to be entirely convincing. The curve possesse s information content, but it is difficult to empirically discriminate between the effects on real interest rates and future inflation. The yield spread is a stable leading indicator for future real economic ac tivity, but there are several theoretical interpretations of this (pos itive) relationship, depending on the nature of shacks hitting the eco nomy and the behaviour of prices in the economy. The proper reaction o f monetary policy could differ among these interpretations. All in all , care should be taken in using the yield curve as information variabl e for monetary policy.