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Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology

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  • Pierre St-Amant

Abstract

In this paper, the author uses structural vector autoregression methodology to decompose U.S. nominal interest rates into an expected inflation component and an ex ante real interest rate component. He identifies inflation expectations and ex ante real interest rate shocks by assuming that nominal interest rates and inflation expectations move one-for-one in the long-run - they are cointegrated (1,1) - and that the real interest rate is stationary. He finds that changes in inflation expectations and in the ex ante real interest rate are both important in explaining fluctuations in the U.S. 1-year and 10-year government bond rates. The author also finds that, while the increase in the 1-year and the 10-year bond rates in the 1970s and the early 1980s mainly reflects higher inflation expectations, changes in ex ante real interest rates appear to account for most of the fluctuations in these rates in 1994 and in the first half of 1995.

Suggested Citation

  • Pierre St-Amant, 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology," Macroeconomics 9602004, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9602004
    Note: 19 printed pages, compressed PostScript file. Other recent Bank of Canada working papers are listed on the last page of this report.
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    References listed on IDEAS

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    2. St-Amant, P., 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest rates Using Structural VAR Methodology," Staff Working Papers 96-2, Bank of Canada.
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    Cited by:

    1. St-Amant, P., 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest rates Using Structural VAR Methodology," Staff Working Papers 96-2, Bank of Canada.
    2. Dopke, Jorg & Fritsche, Ulrich, 2006. "When do forecasters disagree? An assessment of German growth and inflation forecast dispersion," International Journal of Forecasting, Elsevier, vol. 22(1), pages 125-135.
    3. Ulrich Fritsche & Jörg Döpke, 2005. "Forecast Errors and the Macroeconomy: A Non-Linear Relationship?," Discussion Papers of DIW Berlin 498, DIW Berlin, German Institute for Economic Research.
    4. Hugo Oliveros C., 1999. "Expectativas:Una Aproximación A Través De Modelos De Escogencia Discreta," BORRADORES DE ECONOMIA 002697, BANCO DE LA REPÚBLICA.
    5. Van Norden, S. & Vigfusson, R., 1996. "Regime-Switching Models, A guide to the Bank of Canada Gauss Procedures," Staff Working Papers 96-3, Bank of Canada.
    6. Hugo Oliveros, 1999. "Expectativas: Una Aproximación a Través de Modelos de Escogencia Discreta," Borradores de Economia 137, Banco de la Republica de Colombia.

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