The predictive power of the money market term structure

The term structure of interest rates is analyzed using weekly data from the Danish money market. Using the methods from Campbell and Shiller it turns out that interest rate spreads are much more powerful predictors of future interest rates in periods with relative volatile interst rates than in periods with relative smooth interest rates. However, also in the latter case spareds signficantly predict future short rate changes. This implies, among other things, that the slope of the term structure may be used by the monetary authorities as a useful indicator of the tightness of monetary policy.