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Monetary Policy, Expected Inflation, and Inflation Risk Premium

  • Juha Seppala

    (University of Illinois)

  • Federico Ravenna

    (University of California)

negatively correlated, (iii) short-term real interest rates display greater volatility than expected inflation, (iv) nominal interest rates and expected inflation are negatively correlated for short maturities, but positively correlated for long maturities, (v) inflation risk premia are very small and very constant, and (vi) inflation risk premia and expected inflation are significantly negatively correlated. Results (ii) and (iii) are consistent with empirical evidence in Pennacchi (1991). Finally, we show that our economy is consistent with Mundell-Tobin Effect, that is, increases in inflation are associated with higher nominal interest rates, but lower real interest rates.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 513.

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Date of creation: 2007
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Handle: RePEc:red:sed007:513
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