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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. The Southern Finance Association and the Southwestern Finance Association.

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.
  • Handle: RePEc:bla:jfnres:v:25:y:2002:i:3:p:305-320
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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. Alagidede, Paul & Panagiotidis, Theodore, 2010. "Can common stocks provide a hedge against inflation? Evidence from African countries," Review of Financial Economics, Elsevier, vol. 19(3), pages 91-100, August.
    2. K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation In India," Working Papers 2008-038, Madras School of Economics,Chennai,India.
    3. repec:ebl:ecbull:v:5:y:2003:i:2:p:1-7 is not listed on IDEAS
    4. Kam, Eric, 2005. "A note on time preference and the Tobin Effect," Economics Letters, Elsevier, vol. 89(1), pages 127-132, October.
    5. 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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