Alternative Specifications of the German Term Structure and its' Information Content Regarding Inflation

The purpose of the present paper is twofold. First, it describes zero-coupon yield curve estimates for Germany from September 1972 to February 1996 using a variety of curve-fitting procedures. Second, these estimates are examined for their information content regarding future inflation. The paper finds that the German yield curve is informative in the sense defined above, especially in its middle segement between three and eight years. Furthermore, it finds that this result is robust with respect to the specification of the yield curve. Thus, from a monetary policy perspective, the following conclusions may be drawn. The medium-term segment of the yield curve does indeed constitute a useful indicator of future inflation changes. As long as the interpretation of this curve is confined to simple linear inference from its slope to future changes in inflation rates, the choice of the curve fitting approach is of minor importance. To that extent the curve-fitting procedure used by the Bundesbank is appropriate in view of the uses to which the yield estimates were put in the past