1. Svensson (1996) shows that, in contrast to what is suggested by its name, ‘direct’ inflation targeting implies inflation forecast targeting: the central bank’s inflation forcecast becomes the intermediate target.
2. This is not to say that these changes are the sole reason for the loss of predictive power of money. See Friedman and Kuttner (1996) for an extensive discussion.
3. Financial innovation led to the introduction of near monies and advanced the process of financial disintermediation (Sijben, 1995). In combination with liberalisation of international capital markets and deregulation of financial markets this created a range of new substitutes for financial assets included in the targeted monetary aggregates (Shigehara, 1996). The result was a trade-off between stability of money demand and controllability of the monetary aggregate by the central bank: the demand for broadly defined money (which is less controllable by the central bank) is more stable than the demand for narrow money. See Fase and Winder (1993) for details.
4. We define the term structure as the relation between the yields to maturity for different terms to maturity. Here we use the terms ‘term structure’ and ‘yield curve’ in an interchangeable fashion, which is, strictly speaking, not correct: the term structure is a particular yield curve (i.e. for zero-coupon bonds). See Shiller (1990), Svensson (1994) and Haubrich and Dombrosky (1996) for a discussion, and Deacon and Derry (1994) and Shich (1996) for details concerning the construction and estimation of various yield curves.
5. In addition to the yield spread as defined above, there exist other interest rate spreads which also have information content. Friedman and Kuttner (1992, 1993), for example, discuss the information content of the differential between the rate on commercial paper and the rate on Treasury Bills with regard to future inflation as well as future economic activity.