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A model for ex ante real interest rates

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  • Li-Hsueh Chen

Abstract

This paper proposes a new model for estimating economic agents' anticipation of the real rate of interest. It decomposes the nominal short-term interest rate into an ex ante real interest rate and an expected inflation rate, according to Fisher's equation. Assume the ex ante real interest rate follows an autoregressive structure and inflation follows an IMA(1, 1) process. Using the information in the nominal short-term interest rate and the inflation series, the ex ante real interest rate is estimated by maximum likelihood using the Kalman filter to calculate the likelihood function. The results show that the time series of estimates of the ex ante real interest rate extracted from the model rejects the random-walk hypothesis at the 1% significance level.

Suggested Citation

  • Li-Hsueh Chen, 2001. "A model for ex ante real interest rates," Applied Economics Letters, Taylor & Francis Journals, vol. 8(11), pages 713-718.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:11:p:713-718
    DOI: 10.1080/13504850010017681
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    1. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 280-280.
    2. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
    3. Li-Hsueh Chen, 2001. "Inflation and real short-term interest rates - A Kalman filter analysis of the term structure," Applied Economics, Taylor & Francis Journals, vol. 33(7), pages 855-861.
    4. Li-Hsueh Chen, 2001. "Inflation, real short-term interest rates, and the term structure of interest rates: a regime-switching approach," Applied Economics, Taylor & Francis Journals, vol. 33(3), pages 393-400.
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