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Are Expected Inflation Rates and Expected Real Rates Negatively Correlated? A Long-Run Test of the Mundell-Tobin Hypothesis

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  • Keshab Shrestha
  • Sheng-Syan Chen
  • Cheng-few Lee
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    Abstract

    Some empirical evidence suggests that the expected real interest and expected inflation rates are negatively correlated. This hypothesis of negative correlation is sometimes known as the Mundell-Tobin hypothesis. In this article we reinvestigate this negative relation from a long-term point of view using cointegration analysis. The data on the historical interest rate on T-bills and the inflation rate indicate that the Mundell-Tobin hypothesis does not hold in the long run for the United States, the United Kingdom, and Canada. We also obtain similar results using the real interest rate on index-linked gilt traded in the United Kingdom. The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal The Journal of Financial Research.

    Volume (Year): 25 (2002)
    Issue (Month): 3 ()
    Pages: 305-320

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    Handle: RePEc:bla:jfnres:v:25:y:2002:i:3:p:305-320

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    Cited by:
    1. Paul Alagidede & Theodore Panagiotidis, 2010. "Can Common Stocks Provide A Hedge Against Inflation? Evidence from African Countries," Working Paper Series 06_10, The Rimini Centre for Economic Analysis.
    2. repec:ebl:ecbull:v:5:y:2003:i:2:p:1-7 is not listed on IDEAS
    3. K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation in India," Finance Working Papers 22514, East Asian Bureau of Economic Research.
    4. Kam, Eric, 2005. "A note on time preference and the Tobin Effect," Economics Letters, Elsevier, vol. 89(1), pages 127-132, October.

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