The predictive power of real interest rates for future inflation
SubjectInterest rates ; Επιτόκια ; Inflation (Finance) ; Πληθωρισμός (Οικονομία) ; Οικονομετρικά μοντέλα ; Econometric models
This paper will mainly focus on whether real interest rates contain useful information for the expected inflation rate. It analytically explains the theoretical framework that allows the real rate to vary over time and we derive a model that will estimate the relationship between real interest rates and future inflation. It also includes the term structure in these regressions, in order to investigate whether the real rate contains useful information for inflation, over and above the information contained in the term structure. A series of papers have examined the information contained in the term structure about future inflation in the United States-see Fama and Gibbons (1982, 1984), Fama (1990), Mishkin (1988, 1990a, 1990b, 1991). The general finding is that the longer the time horizon the more information the term structure possesses about the future inflation. At the shortest end, i.e. for maturities up to six months, the term structure is found to have little predictive ability for inflation.