IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this book chapter

Interest rates and inflation: A continuous time stochastic approach

In: Economic Uncertainty, Instabilities And Asset Bubbles Selected Essays

Listed author(s):
  • A. G. Malliaris

    (Loyola University of Chicago, Chicago, IL 60611, USA)

  • Walter F. Mullady

    (Loyola University of Chicago, Chicago, IL 60611, USA)

  • M. E. Malliaris

    (Loyola University of Chicago, Chicago, IL 60611, USA)

AbstractThis paper investigates the theoretical foundations of Fisher's equation which expresses the nominal interest rate as the sum of the real interest rate and the expected rate of inflation. To emphasize Fisher's (1930) original formulation and Sargent's (1973) recent suggestion that nominal interest rates and inflation are simultaneously determined rather than having the causation go from inflation to interest rates, we develop a two-equation continuous time stochastic model to build a more solid theoretical foundation of Fisher's equation. Assuming that the nominal interest rate and the rate of inflation follow Itô processes we derive an Itô equation that allows us to express and compute the expected real interest rate and its volatility. These two equations generalize the traditional Fisher equation and an illustration using US long data from 1865–1972 shows the usefulness of our results.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Ebook Access is available upon purchase.

File URL:
Download Restriction: Ebook Access is available upon purchase.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

in new window

This chapter was published in:
  • A G Malliaris, 2005. "Economic Uncertainty, Instabilities and Asset Bubbles:Selected Essays," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 5864, July-Dece.
  • This item is provided by World Scientific Publishing Co. Pte. Ltd. in its series World Scientific Book Chapters with number 9789812701015_0004.
    Handle: RePEc:wsi:wschap:9789812701015_0004
    Contact details of provider: Web page:

    Order Information: Email:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812701015_0004. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.