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Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons

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  • Michael D. Bordo
  • William G. Dewald

Abstract

We define the Fisherian Golden Rule measure of bond market inflation expectations as the difference between bond rates and trend real GDP growth rates. The concept is based on the Fisherian theory that an increase in longer-term inflation expectations would be reflected in longer-term interest rates and the Golden Rule theory that in longer-term equilibrium the real rates of interest would equal the growth rate of real output. We compare the bond market inflation experiences of 13 advanced countries for the 1881-1913 gold standard era with the experience of the recent 1962 1995 period. The difference between average longer-term bond rates and average real GDP growth rates reflected the widespread expectation of low inflation during 1881-1913 in all of the industrial countries. Although real GDP growth was somewhat higher on average during 1962-65 than 1881-1913, bond rate averages were considerably higher, roughly comparable with the higher observed inflation rates. Long-term bond rates fell across the spectrum of the industrial countries in the 1980s and 1990s and bond market expectations for low inflation were substantially, but not fully regained for the industrial countries as a group.

Suggested Citation

  • Michael D. Bordo & William G. Dewald, 2001. "Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons," NBER Working Papers 8582, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8582
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    References listed on IDEAS

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    1. Michael D. Bordo, 1993. "The gold standard, Bretton Woods and other monetary regimes: a historical appraisal," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 123-191.
    2. U. Michael Bergman & Michael D. Bordo & Lars Jonung, 1998. "Historical evidence on business cycles: the international experience," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun), pages 65-119.
    3. William G. Dewald, 1998. "Inflation, real interest tax wedges, and capital formation," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 29-35.
    4. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234 Elsevier.
    5. William G. Dewald, 1998. "Inflation, real interest tax wedges, and capital formation," Working Papers 1998-005, Federal Reserve Bank of St. Louis.
    6. Jeffrey C. Fuhrer & Scott Schuh, 1998. "Beyond shocks: what causes business cycles?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun).
    7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Lingfeng Li, 2003. "Macroeconomic Factors and the Correlation of Stock and Bond Returns," Yale School of Management Working Papers ysm328, Yale School of Management.
    2. Weißbach, Rafael & Ponyatovskyy, Vladyslav & Zimmermann, Guido, 2006. "The Yield of Ten-Year T-Bonds: Stumbling Towards a 'Good' Forecast," Technical Reports 2006,50, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
    3. Binder, Carola Conces, 2016. "Estimation of historical inflation expectations," Explorations in Economic History, Elsevier, vol. 61(C), pages 1-31.
    4. Hanes, Christopher & Rhode, Paul W., 2013. "Harvests and Financial Crises in Gold Standard America," The Journal of Economic History, Cambridge University Press, vol. 73(01), pages 201-246, March.
    5. David M. Cutler & Grant Miller, 2006. "Water, Water Everywhere. Municipal Finance and Water Supply in American Cities," NBER Chapters,in: Corruption and Reform: Lessons from America's Economic History, pages 153-184 National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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