Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis
Rodney L. White Center for Financial Research Paper No. 2-95
Posted: 10 Mar 1995
We develop a method of measuring ex-ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, we directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. We find a negative correlation between ex-ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Mundell and Tobin, Darby and Feldstein, and Stulz. We also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty.
JEL Classification: E31, E43
Suggested Citation: Suggested Citation