Inflation targets and the yield curve: New Zealand and Australia versus the US

This study considers whether the slope of-the yield curve for New Zealand c ontains useful economic information. In order to provide some perspective, the present study also contrasts the New Zealand experience with evidence b ased on US and Australian data. The principal findings of this study are as follows: (1) At short horizons, typically 2 years or less, the term struct ure for New Zealand behaves as in the expectations hypothesis of the term s tructure. (2) Nevertheless, there are departures from the expectations hypo thesis, especially in the period when inflation objectives in New Zealand w ere on a declining path. Moreover, the policies of the US had a critically important impact around 1993-1994. (3) Some evidence was found of an effect from the spread to future inflation but only when the headline CPI is used to measure inflation; the links disappear entirely once CPI ex-credit cost s are employed. The study argues that such results are consistent with a cr edible inflation targeting regime, so that the term structure serves possib ly to signal changes in real interest rates rather than inflation in New Ze aland. (4) There is good evidence that the spread helps predict future outp ut in New Zealand, although the effect seems to dissipate after 1 year. Onc e we distinguish between periods of positive versus negative growth rates i n real gross domestic product (GDP), the spread influences output up to 2 y ears into the future. Also, when output growth is measured asymmetrically, rising inflation expectations depress output growth. Copyright (C) 2000 Joh n Wiley & Sons, Ltd.