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

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