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

1996 ◽  
Author(s):  
Pierre St-Amant
Keyword(s):  
Interest Rates ◽  
Structural Var ◽  
Real Interest Rates ◽  
Expected Inflation ◽  
Nominal Interest Rates ◽  
Ex Ante

Treasury Bills, Bonds And Sector Inflation Indices: A Spectral Analysis

2011 ◽  
Vol 19 (2) ◽  
Author(s):  
Maurice Larrain
Keyword(s):  
Interest Rates ◽  
Raw Materials ◽  
Consumer Price Index ◽  
Real Interest Rates ◽  
Financial Model ◽  
Treasury Bills ◽  
Taylor Rules ◽  
Expected Inflation ◽  
Nominal Interest Rates ◽  
Long Time

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">This paper uses spectral and correlation techniques to analyze the relationship between several inflation indicators and nominal interest rates. Empirical definitions of real interest rates reduce to stating real rates are equal to nominal interest rates minus expected inflation. To represent a number for inflation, economy-wide measures such as the GDP deflator or the Consumer Price Index are employed. This uncritical usage results more often than not in implausible values for real interest rates. In particular, volatile negative real rates are encountered for prolonged periods ranging from six months to up to three years. Such long time intervals for negative real rates amounts to accepting the unrealistic proposition that profit maximizing lenders, such as commercial bank officers, pay hefty fees to borrowers to have them use their institution's loanable funds. This paper questions the effectiveness of GDP or CPI inflation measures in surrogating for expected inflation. We find instead that narrower sector (industry) inflation indices such as fuels or raw materials prices appear to be improved measures. The issue matters since accurate real interest rate estimates are necessary for policy (Taylor rules), financial model evaluation, and discounting.<strong style="mso-bidi-font-weight: normal;"></strong></span></span></p>

scholarly journals A New Approach to Gauging Inflation Expectations

2009 ◽  
pp. 1-4
Author(s):  
Joseph G. Haubrich
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
New Method ◽  
Inflation Expectations ◽  
Real Interest Rates ◽  
Inflation Risk ◽  
New Approach ◽  
Expected Inflation ◽  
Inflation Risk Premium

This Economic Commentary explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations.

scholarly journals The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression

2013 ◽  
Vol 103 (3) ◽  
pp. 66-72 ◽  
Author(s):  
Christina D Romer ◽  
David H Romer
Keyword(s):  
Interest Rates ◽  
Detailed Analysis ◽  
Great Depression ◽  
Federal Reserve ◽  
Transmission Mechanism ◽  
Monetary Shocks ◽  
Real Interest Rates ◽  
The Great Depression ◽  
Nominal Interest Rates ◽  
Business Week

This paper examines the missing transmission mechanism in Friedman's and Schwartz's monetary explanation of the Great Depression. We review the challenge provided by the decline in nominal interest rates in the early 1930s, and show that the monetary explanation requires not just that there were expectations of deflation, but that they were caused by monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.

A model for ex ante real interest rates

2001 ◽  
Vol 8 (11) ◽  
pp. 713-718 ◽  
Author(s):  
Li-Hsueh Chen
Keyword(s):  
Interest Rates ◽  
Real Interest Rates ◽  
Ex Ante
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