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Forward Interest Rates as Indicators of Inflation Expectations

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  • Soderlind, P.

Abstract

Forward interest rates have become popular indicators of inflation expectations. The usefulness of this indicator depends on the relative volatilty and the correlation of inflation expectations and expected real interest rates. This paper studies U.S. and U.K. data, using a range of different tools and data sets. The forward rate rule perfoms reasonably well, in spite of significant movements in the expected real interest rate. The reason is that the 'noise' that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 594.

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Length: 28 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:fth:stocin:594

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Keywords: INTEREST RATE; MONETARY POLICY;

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References

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  1. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
  2. Robert J. Shiller & J. Huston McCulloch, 1987. "The Term Structure of Interest Rates," NBER Working Papers 2341, National Bureau of Economic Research, Inc.
  3. Christopher Ragan, 1995. "Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates," Macroeconomics 9502003, EconWPA.
  4. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
  5. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  7. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, May.
  8. Pearce, Douglas K, 1987. "Short-term Inflation Expectations: Evidence from a Monthly Survey: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 388-95, August.
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Cited by:
  1. Marcelo Savino Portugal & Angelo Marsiglia Fasolo, 2004. "Imperfect Rationality and Inflationary Inertia: A New Estimation of the Phillips Curve for Brazil," Econometric Society 2004 Latin American Meetings 5, Econometric Society.
  2. Canova, Fabio & Gambetti, Luca, 2009. "Do expectations matter? The Great Moderation revisited," CEPR Discussion Papers 7597, C.E.P.R. Discussion Papers.
  3. Stefan Gerlach, 1995. "The information content of the term structure: evidence for Germany," BIS Working Papers 29, Bank for International Settlements.
  4. Francis Breedon & Jag Chadha, 1997. "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England.

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