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

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

Abstract

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.

Suggested Citation

  • Keshab Shrestha & Sheng‐Syan Chen & Cheng‐few Lee, 2002. "Are Expected Inflation Rates and Expected Real Rates Negatively Correlated? A Long‐Run Test of the Mundell‐Tobin Hypothesis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(3), pages 305-320, September.
    • Handle: RePEc:bla:jfnres:v:25:y:2002:i:3:p:305-320
    DOI: 10.1111/1475-6803.t01-1-00020
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    References listed on IDEAS

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    1. Martin D. Evans & Paul Wachtel, 1990. "A Modern Look At Asset Pricing and Short-Term Interest Rates," NBER Working Papers 3245, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Paul Alagidede & Theodore Panagiotidis, 2010. "Can common stocks provide a hedge against inflation? Evidence from African countries," Review of Financial Economics, John Wiley & Sons, vol. 19(3), pages 91-100, August.
    2. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    3. repec:ebl:ecbull:v:5:y:2003:i:2:p:1-7 is not listed on IDEAS
    4. Eric Kam & Paul Missios, 2003. "Wealth effects in a cash-in-advance economy," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-7.
    5. K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation in India," Finance Working Papers 22514, East Asian Bureau of Economic Research.
    6. Kam, Eric, 2005. "A note on time preference and the Tobin Effect," Economics Letters, Elsevier, vol. 89(1), pages 127-132, October.
    7. Adel A. Al-Sharkas & Marwan Al-Zoubi, 2011. "Stock Prices and Inflation: Evidence from Jordan, Saudi Arabia, Kuwait, and Morocco," Working Papers 653, Economic Research Forum, revised 12 Jan 2011.

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