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

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  • Chan, Louis K C

Abstract

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.

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  • 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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    Cited by:

    1. Stefania D'Amico & Don H Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," BIS Working Papers 248, Bank for International Settlements.
    2. 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.
    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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