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Real Interest, Money Surprises and Anticipated Inflation

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  • John H. Makin
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    Abstract

    This paper investigates the hypothesis that surprise changes in the money supply and anticipated inflation (the Mundell-Tobin effect) are both inversely related to the expected real interest rate. The two novel aspects of the investigation are tests of the hypothesized impact of money surprises on real rates while simultaneously testing the Mundell-Tobin hypothesis and estimation employing transfer function methodology developed by Box and Jenkins (1970). The transfer function enables the investigator to entertain the hypothesis that residuals may not follow a simple AR-1 process, as is usually assumed in corrections for correlated residuals, but rather may be appropriately represented by a more complex ARMA process. Based on quarterly data from 1959-1 - 1980-IVY results obtained constitutes failure to reject either an inverse relationship between money surprises and expected real interest or an inverse relationship between anticipated inflation and expected real interest. These findings do not constitute a rejection of market efficiency.

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    File URL: http://www.nber.org/papers/w0818.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0818.

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    Date of creation: Dec 1981
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    Handle: RePEc:nbr:nberwo:0818

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    References

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    1. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    2. Carlson, John A, 1977. "Short-Term Interest Rates as Predictors of Inflation: Comment," American Economic Review, American Economic Association, vol. 67(3), pages 469-75, June.
    3. Hess, Patrick J. & Bicksler, James L., 1975. "Capital asset prices versus time series models as predictors of inflation: The expected real rate of interest and market efficiency," Journal of Financial Economics, Elsevier, vol. 2(4), pages 341-360, December.
    4. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
    5. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-76, June.
    6. Dwyer, Gerald Jr., 1981. "Are expectations of inflation rational? or Is variation of the expected real interest rate unpredictable?," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 59-84.
    7. Levi, Maurice D & Makin, John H, 1978. "Anticipated Inflation and Interest Rates: Further Interpretation of Findings on the Fisher Equation," American Economic Review, American Economic Association, vol. 68(5), pages 801-12, December.
    8. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
    9. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
    10. Khan, Mohsin S., 1983. "Estimating models of expectations : A simplified sequential approach," Economics Letters, Elsevier, vol. 12(2), pages 175-180.
    11. Bomberger, William A & Frazer, William J, Jr, 1981. "Interest Rates, Uncertainty and the Livingston Data," Journal of Finance, American Finance Association, vol. 36(3), pages 661-75, June.
    12. Tanzi, Vito, 1980. "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, American Economic Association, vol. 70(1), pages 12-21, March.
    13. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 755-765, November.
    14. Cornell, Bradford, 1981. "Can monetary policy affect the ex-ante real rate: new tests using daily data," Proceedings, Federal Reserve Bank of San Francisco, issue 5, pages 4-46.
    15. Joines, Douglas, 1977. "Short-Term Interest Rates as Predictors of Inflation: Comment," American Economic Review, American Economic Association, vol. 67(3), pages 476-77, June.
    16. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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    Cited by:
    1. Brian Motley, 1983. "Real interest rates, money and government deficits," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 31-45.

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