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Forward Interest Rates as Indicators of Inflation Expectations

  • Söderlind, Paul

Forward interest rates have become popular indicators of inflation expectations. The usefulness of this indicator depends on the relative volatility and the correlation of inflation expectations and expected real interest rates. This paper studies US and UK data, using a range of different tools and data sets. The forward rate rule performs reasonably well, in spite of significant movements in the expected real interest rate. The reason is that the 'noise' that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1313.

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Date of creation: Dec 1995
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Handle: RePEc:cpr:ceprdp:1313
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  1. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May.
  2. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
  3. Christopher Ragan, . "Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates," Working Papers 95-1, Bank of Canada.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  5. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, March.
  6. Milton Friedman & Anna Jacobson Schwartz, 1970. "Monetary Statistics of the United States: Estimates, Sources, Methods," NBER Books, National Bureau of Economic Research, Inc, number frie70-1, June.
  7. Pearce, Douglas K, 1987. "Short-term Inflation Expectations: Evidence from a Monthly Survey: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 388-95, August.
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