Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis

J. OF FINANCE, Vol. 51 No. 1

Posted: 10 Jul 1996

See all articles by Shmuel Kandel (deceased)

Shmuel Kandel (deceased)

affiliation not provided to SSRN (deceased)

Aharon R. Ofer

Northwestern University - Kellogg School of Management; Tel Aviv University - The Leon Recanati Graduate School of Business Administration

Oded Sarig

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship; University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Abstract

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: 43

Suggested Citation

Kandel (deceased), Shmuel and Ofer, Aharon R. and Sarig, Oded H., Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis. J. OF FINANCE, Vol. 51 No. 1, Available at SSRN: https://ssrn.com/abstract=7581

Shmuel Kandel (deceased)

affiliation not provided to SSRN (deceased)

Aharon R. Ofer (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-3562 (Phone)
847-491-5719 (Fax)

Tel Aviv University - The Leon Recanati Graduate School of Business Administration

P.O. Box 39010
Ramat Aviv Tel Aviv 69972, 69978
Israel

Oded H. Sarig

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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