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Consumption, Inflation Risk, and Real Interest Rates: An Empirical Analysis


  • Chan, Louis K C


The consumption-based asset pricing model is used to examine the relation between inflation and interest rates. To the extent that inflation is correlated with real consumption opportunities, expected real interest rates should incorporate a premium for inflation covariance risk. The empirical results suggest a statistically reliable premium for inflation covariability risk in short-term interest rates. Moreover, part of the time-series variation in inflation covariability risk is predictable. Copyright 1994 by University of Chicago Press.

Suggested Citation

  • Chan, Louis K C, 1994. "Consumption, Inflation Risk, and Real Interest Rates: An Empirical Analysis," The Journal of Business, University of Chicago Press, vol. 67(1), pages 69-96, January.
  • Handle: RePEc:ucp:jnlbus:v:67:y:1994:i:1:p:69-96

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    References listed on IDEAS

    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    4. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
    5. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    6. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    7. Mark Rubinstein., 1989. "Market Basket Alternatives," Research Program in Finance Working Papers RPF-187, University of California at Berkeley.
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    Cited by:

    1. Thomas C. Melzer, 1997. "To conclude: keep inflation low and, in principle, eliminate it," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-7.
    2. Stefania D'Amico & Don H. Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," Finance and Economics Discussion Series 2008-30, Board of Governors of the Federal Reserve System (U.S.).
    3. Guler, Bulent & Ozlale, Umit, 2005. "Is there a flight to quality due to inflation uncertainty?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 345(3), pages 603-607.

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