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Real Interest, Money Surprises and Anticipated Inflation

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  • John H. Makin

Abstract

This paper investigates the hypothesis that surprise changes in the money supply and anticipated inflation (the Mundell-Tobin effect) are both inversely related to the expected real interest rate. The two novel aspects of the investigation are tests of the hypothesized impact of money surprises on real rates while simultaneously testing the Mundell-Tobin hypothesis and estimation employing transfer function methodology developed by Box and Jenkins (1970). The transfer function enables the investigator to entertain the hypothesis that residuals may not follow a simple AR-1 process, as is usually assumed in corrections for correlated residuals, but rather may be appropriately represented by a more complex ARMA process. Based on quarterly data from 1959-1 - 1980-IVY results obtained constitutes failure to reject either an inverse relationship between money surprises and expected real interest or an inverse relationship between anticipated inflation and expected real interest. These findings do not constitute a rejection of market efficiency.

Suggested Citation

  • John H. Makin, 1981. "Real Interest, Money Surprises and Anticipated Inflation," NBER Working Papers 0818, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0818
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    References listed on IDEAS

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    1. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    2. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    3. Joines, Douglas, 1977. "Short-Term Interest Rates as Predictors of Inflation: Comment," American Economic Review, American Economic Association, vol. 67(3), pages 476-477, June.
    4. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    5. Levi, Maurice D & Makin, John H, 1978. "Anticipated Inflation and Interest Rates: Further Interpretation of Findings on the Fisher Equation," American Economic Review, American Economic Association, vol. 68(5), pages 801-812, December.
    6. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    7. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 755-765, November.
    8. Bomberger, William A & Frazer, William J, Jr, 1981. "Interest Rates, Uncertainty and the Livingston Data," Journal of Finance, American Finance Association, vol. 36(3), pages 661-675, June.
    9. Dwyer, Gerald Jr., 1981. "Are expectations of inflation rational? or Is variation of the expected real interest rate unpredictable?," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 59-84.
    10. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-276, June.
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    12. Tanzi, Vito, 1980. "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, American Economic Association, vol. 70(1), pages 12-21, March.
    13. Cornell, Bradford, 1981. "Can monetary policy affect the ex-ante real rate: new tests using daily data," Proceedings, Federal Reserve Bank of San Francisco, issue 5, pages 4-46.
    14. Michael W. Keran & Charles Pigott, 1980. "Interest rates and exchange rates: II, policy implications," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep19.
    15. Khan, Mohsin S., 1983. "Estimating models of expectations : A simplified sequential approach," Economics Letters, Elsevier, vol. 12(2), pages 175-180.
    16. Carlson, John A, 1977. "Short-Term Interest Rates as Predictors of Inflation: Comment," American Economic Review, American Economic Association, vol. 67(3), pages 469-475, June.
    17. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
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    Cited by:

    1. Brian Motley, 1983. "Real interest rates, money and government deficits," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 31-45.

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