Inflation Targeting Reduces Predictive Power of Term Spreads for Inflation
The article explores how inflation targeting affects the ability of term spreads to predict future inflation. By comparing inflation-targeting countries with those that do not have IT, the researchers found that term spreads are less effective at predicting inflation in countries with IT. This suggests that when inflation is anchored to a target rate, changes in term spreads may contain information other than future inflation, reducing their predictive power.