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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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    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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