Real interest rates and inflation: An ex-ante empirical analysis

Shmuel Kandel, Aharon R. Ofer, Oded Sarig

Research output: Contribution to journalArticlepeer-review

54 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)205-225
Number of pages21
JournalJournal of Finance
Volume51
Issue number1
DOIs
StatePublished - Jan 1 1996

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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