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

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Author Info
 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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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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  1. Mauricio Larraín, 2007. "Inflation Compensation and Inflation Expectations in Chile," Working Papers Central Bank of Chile 421, Central Bank of Chile. [Downloadable!]
  2. 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. [Downloadable!]
  3. Francis Breedon & Jag Chadha, . "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England. [Downloadable!]
  4. Noor A. Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor and Francis Journals, vol. 13(10), pages 763-769, October. [Downloadable!] (restricted)
  5. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Banco de España Occasional Papers 0705, Banco de España. [Downloadable!]
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  6. 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. [Downloadable!]
  7. Peter Hördahl & Oreste Tristani, 2007. "Mortage interest rate dispersion in the euro area," Working Paper Series 734, European Central Bank. [Downloadable!]
  8. 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.). [Downloadable!]
  9. 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. [Downloadable!]
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