The information content of the yield curve for monetary policy: A survey

The information content of the yield curve with respect to future inflation as well as future real economic activity is discussed. Both theoretical arguments and the empirical validity of these arguments are reviewed. The empirics favouring the yield curve as leading indicator for inflation is nor found to be entirely convincing. The curve possesses 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 activity, but there are several theoretical interpretations of this (positive) relationship, depending on the nature of shacks hitting the economy and the behaviour of prices in the economy. The proper reaction of monetary policy could differ among these interpretations. All in all, care should be taken in using the yield curve as information variable for monetary policy.