The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation

This paper examines the relationship between the term structure of interest rates and future changes in inflation for Canada using a newly constructed par-value yield series. The main conclusion of the empirical work is that the slope of the nominal term structure from 1- to 5-year maturities is a reasonably good predictor of future changes in inflation over these horizons. This result is similar to that obtained for the United States and other countries. Results for models that also include competing indicators of inflation suggest that the medium-term structure of interest rates contains unique information about future inflation. Although there is additional information about future changes in inflation in M2+, commodity prices, and the output gap, this does not affect the predictive content of the medium-term structure.