Term Structure or Money Growth as Leading Indicator of Inflation: An Empirical Analysis for Germany *

The Bundesbank uses a monetary aggregate as an intermediate target in order to control the inflation rate. However, recent empirical studies cast doubt on the stability of this relation, but also suggest that interest rate spreads have strong predictive power for future movements of inflation rates. In this paper the predictive power of several money growth rates and interest rate spreads for the development of inflation rates is analysed. In contrast to other investigations we use frequency domain methods allowing to reveal the relations between the different components of the time series more detailed. All in all there is no strong empirical evidence in favour of the use of leading indicators for predicting inflation.