Forward Interest Rates as Indicators of Inflation Expectations
AbstractForward 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 InfoPaper provided by Stockholm - International Economic Studies in its series Papers with number 594.
Length: 28 pages
Date of creation: 1995
Date of revision:
Contact details of provider:
Postal: UNIVERSITY OF STOCKHOLM, INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES, S- 106 91 STOCKHOLM SWEDEN.
Web page: http://www.iies.su.se/
More information through EDIRC
INTEREST RATE; MONETARY POLICY;
Other versions of this item:
- Söderlind, Paul, 1995. "Forward Interest Rates as Indicators of Inflation Expectations," CEPR Discussion Papers 1313, C.E.P.R. Discussion Papers.
- Söderlind, Paul, 1997. "Forward Interest Rates as Indicators of Inflation Expectations," Seminar Papers 594, Stockholm University, Institute for International Economic Studies.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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