Seminar Papers, Institute for International Economic Studies, Stockholm University
Forward Interest Rates as Indicators of Inflation Expectations
Abstract: Forward interest rates have become popular indicators of
inflation expectations. The usefulness of this indicator depends on the
relative volatilty and the correlation of inflation expectations and
expected real interest rates. This paper studies U.S. and U.K. data, using
a range of different tools and data sets. The forward rate rule perfoms
reasonably well, in spite of significant movements in the expected real
interest rate. The reason is that the 'noise' that movements in the
expected real interest rate add to the inflation expectations is balanced
by a tendency for expected real interest rates and inflation expectations
to move in opposite directions.
Keywords: Inflation expectations; real interest rates; forward rates.; (follow links to similar papers)
JEL-Codes: E31; E43; E44; G12; (follow links to similar papers)
28 pages, October 31, 1997
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