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Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis

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  • Kandel, Shmuel
  • Ofer, Aharon R
  • Sarig, Oded

Abstract

The authors develop a method of measuring ex ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, they directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. The authors find a negative correlation between ex ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Robert A. Mundell and James Tobin, Michael R. Darby and Martin Feldstein, and Rene Stulz. The authors also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty. Copyright 1996 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 51 (1996)
Issue (Month): 1 (March)
Pages: 205-25

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Handle: RePEc:bla:jfinan:v:51:y:1996:i:1:p:205-25

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Cited by:
  1. Peter Hoerdahl & Oreste Tristani, 2007. "Inflation risk premia in the term structure of interest rates," BIS Working Papers 228, Bank for International Settlements.
  2. George M. von Furstenberg & Michael T. Gapen, 1998. "Conditional Indexation Bias in Yields Reported on Inflation-Indexed Securities with Special Reference to UDIBONOS and TIPS," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 149-188, July-Dece.
  3. Azoulay, Eddy & Brenner, Menachem & Landskroner, Yoram & Stein, Roy, 2014. "Inflation risk premium implied by options," Journal of Economics and Business, Elsevier, vol. 71(C), pages 90-102.
  4. Francis Breedon & Jag Chadha, 1997. "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England.
  5. J. Benson Durham, 2006. "An estimate of the inflation risk premium using a three-factor affine term structure model," Finance and Economics Discussion Series 2006-42, Board of Governors of the Federal Reserve System (U.S.).
  6. Ayelet Balsam & Shmuel Kandel & Ori Levy, . "Ex-Ante Real Rates and Inflation Risk Premiums: A Consumption-Based Approach," Rodney L. White Center for Financial Research Working Papers 22-98, Wharton School Rodney L. White Center for Financial Research.
  7. Kasimir Kaliva, 2008. "The Fisher effect, survey data and time-varying volatility," Empirical Economics, Springer, vol. 35(1), pages 1-10, August.
  8. Laatsch, Francis E. & Klein, Daniel P., 2003. "Nominal rates, real rates, and expected inflation: Results from a study of U.S. Treasury Inflation-Protected Securities," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 405-417.
  9. Anderson, Hamish D. & Malone, Christopher B. & Marshall, Ben R., 2008. "Investment returns under right- and left-wing governments in Australasia," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 252-267, June.
  10. Malliaropulos, Dimitrios, 2000. "A note on nonstationarity, structural breaks, and the Fisher effect," Journal of Banking & Finance, Elsevier, vol. 24(5), pages 695-707, May.
  11. Thomas C. Melzer, 1997. "To conclude: keep inflation low and, in principle, eliminate it," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-7.
  12. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a Central Bank perspective," Occasional Paper Series 62, European Central Bank.
  13. Reschreiter, Andreas, 2004. "Conditional funding costs of inflation-indexed and conventional government bonds," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1299-1318, June.
  14. Rokon Bhuiyan, 2013. "Inflationary expectations and monetary policy: evidence from Bangladesh," Empirical Economics, Springer, vol. 44(3), pages 1155-1169, June.
  15. Fletcher, Donna J. & Gulley, O. David, 1996. "Forecasting the real interest rate," The North American Journal of Economics and Finance, Elsevier, vol. 7(1), pages 55-76.
  16. Marco Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," Working Paper 98-6, Federal Reserve Bank of Atlanta.
  17. Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, pages 3-14.
  18. Noor Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 763-769.

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