The information content of the German term structure regarding inflation

The paper investigates the information content of the German term structure regarding inflation, defined as the ability of the yield curve's slope to predict future changes in inflation rates. The empirical tests show that the German yield curve is informative in that sense, especially in its middle segment between three and eight years. A new robustness test is considered. Besides the specification in terms of yields-to-maturity, which has traditionally been employed by the Bundesbank and by previous empirical research, zero-coupon rates (are considered) estimated using the Svensson (IMF Working Paper No. 114, 1994) approach. This takes account of the fact that tests of the expectations hypothesis are in fact tests of joint hypotheses, among them, that the yield curve specification used gives an unbiased picture of the relevant information and that the specific formulation of the expectations hypothesis is valid. Despite the considerable differences between the two yield curve specifications, the results regarding the information content are overall robust with respect to the choice of the specification.