Forecasting interest rates and inflation from bivariate time-series models: Can threshold cointegration models beat linear structures?
نویسنده
چکیده
Using data from Germany, Japan, UK, and the U.S., we explore possible threshold cointegration in nominal shortand long-run interest rates with corresponding inflation rates. Traditional cointegration implies perfect mean reversion in real rates and hence confirms the Fisher hypothesis. Threshold cointegration accounts for the possibility that this mean reversion is active only conditional on certain threshold values in the observed variables. We investigate whether findings of such effects can be exploited for prediction. The forecasting experiments demonstrate that, although the threshold cointegration models provide an internally consistent and attractive framework, they are at best weakly supported by empirical evidence.
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