The Term Structure of Interest Rate as a Predictor of Inflation and Real Economic Activity: Nonlinear Evidence from Turkey

Abstract

This study investigates whether the term structure of interest rates contains useful information about future real economic activity and inflation in Turkey during the 1991:7-2004:3 periods. In order to analyze these relationships, we have employed the Generalized Impulse Response (GIRF) analysis to the Logistic Smooth Transition Vector Autoregressive (LSTVAR) model. We have determined that the results of a GIRF analysis are consistent with the recursive Chow test and parameter stability tests. Besides, we have found out that the relationships between spread-real economic activity and spread-inflation are negative. These negative relationships have also been examined by GIRF analysis; because of a negative reverse relationship between Expectation Hypothesis and Interest Transmission Channel, a negative correlation between real economic activity and spread has occurred.Term Structure of Interest Rates; Monetary Policy; LSTVAR; GIRF; Real Economic Activity; Inflation