Real Interest Rates, Anticipated Inflation, and Unanticipated Money: A Multi-Country Study

In this paper we examine real interest rate behavior in Canada, West Germany, the United States, and the United Kingdom using a model that yields a semi-reduced form equation linking the real interest rate to monetary growth shocks, anticipated inflation, and expected inflation variance. The estimat...

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Bibliographic Details
Published in:The review of economics and statistics 1985-05, Vol.67 (2), p.284-296
Main Authors: Dennis L. Hoffman and, Schlagenhauf, Don E.
Format: Article
Language:English
Subjects:
Anticipated inflation
Behavior
BEHAVIORISM
Coefficients
Econometrics
Economic models
Economic theory
Expected
GROWTH (ALL TYPES)
INFLATION
Inflation rates
INTEREST (IN FINANCIAL CONTEXT)
Interest rates
INTERNATIONAL RELATIONS
LINKAGE
MODELING, MODELS
MONETARY POLICY & ECONOMICS
Nominal interest rates
POWER, PARTICIPATION IN DECISION-MAKING
Real interest rates
REGRESSION
Regression analysis
Regression coefficients
Statistical variance
Studies
Survey data
UNITED KINGDOM
UNITED STATES, 1945 TO PRESENT
Variable coefficients
WEST GERMANY
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Summary:In this paper we examine real interest rate behavior in Canada, West Germany, the United States, and the United Kingdom using a model that yields a semi-reduced form equation linking the real interest rate to monetary growth shocks, anticipated inflation, and expected inflation variance. The estimator used in our analysis accommodates regressors from other regressions--ensuring that accurate inferences are obtained. In all countries we find that increases in anticipated inflation intially dampen real interest rates. In addition, a significant and negative relationship between unanticipated money shocks and real interest across all countries is discovered. Inflation variance typically exhibits little explanatory power.
ISSN:0034-6535
1530-9142
DOI:10.2307/1924728