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Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data

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Author Info
Pennacchi, George G
Abstract

In the context of an equilibrium asset-pricing model, the dynamics of the instantaneous real interest rate and the instantaneous rate of expected inflation are estimated. Unlike previous models, we allow real interest rates and inflation to be mutually dependent processes. The model is estimated as a state-space system that includes observations on various maturity Treasury bills and NBER-ASA survey forecasts of inflation. Over the period 1968-88, we find evidence that instantaneous real interest rates and expected inflation are significantly negatively correlated. Real interest rates also display greater volatility and weaker mean reversion than expected inflation. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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File URL: http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 4 (1991)
Issue (Month): 1 ()
Pages: 53-86
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Handle: RePEc:oup:rfinst:v:4:y:1991:i:1:p:53-86

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  1. Claessens, Stijn & Pennacchi, George, 1992. "Deriving developing country repayment capacity from the market prices of sovereign debt," Policy Research Working Paper Series 1043, The World Bank. [Downloadable!]
  2. Isabelle Bajeux-Besnainou & James V. Jordan & Roland Portait, 2001. "An Asset Allocation Puzzle: Comment," American Economic Review, American Economic Association, vol. 91(4), pages 1170-1179, September. [Downloadable!] (restricted)
  3. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2000. "Money, interest rates, and exchange rates with endogenously segmented markets," Staff Report 278, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  5. Gonzalo Cortazar & Eduardo S. Schwartz & Lorenzo F. Naranjo, 2007. "Term-structure estimation in markets with infrequent trading," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 353-369. [Downloadable!]
  6. Robert Rich & Joseph Tracy, 2003. "Modeling uncertainty: predictive accuracy as a proxy for predictive confidence," Staff Reports 161, Federal Reserve Bank of New York. [Downloadable!]
  7. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2009. "Monetary Policy Shifts and the Term Structure," NBER Working Papers 15270, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Simon Babbs & K. Nowman, 1998. "Econometric Analysis of a Continuous Time Multi-Factor Generalized Vasicek Term Structure Model: International Evidence," Asia-Pacific Financial Markets, Springer, vol. 5(2), pages 159-183, May. [Downloadable!] (restricted)
  9. Ravenna , Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland. [Downloadable!]
  10. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2000. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Asset Markets," NBER Working Papers 7871, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Chernov, Mikhail & Mueller, Philippe, 2008. "The Term Structure of Inflation Expectations," CEPR Discussion Papers 6809, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Monfort, A. & Pegoraro, F., 2007. "Multi-Lag Term Structure Models with Stochastic Risk Premia," Documents de Travail 189, Banque de France. [Downloadable!]
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  13. John Y. Campbell & Luis M. Viceira, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March. [Downloadable!] (restricted)
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  14. Ahmad Telfah, . "" Do Financial Planners Take Financial Crashes In Their Advice: Dynamic Asset Allocation Under Thick Tails And Fast Volatility Updating," API-Working Paper Series 0604, Arab Planning Institute - Kuwait, Information Center. [Downloadable!]
  15. Kim, Don H. & Orphanides, Athanasios, 2005. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," CEPR Discussion Papers 5341, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. Sørensen, Carsten & Trolle, Anders Bjerre, 2006. "Dynamic asset allocation and latent variables," Working Papers 2004-8, Copenhagen Business School, Department of Finance. [Downloadable!]
  17. Munk, Claus & Sørensen, Carsten & Vinther, Tina Nygaard, 2001. "Portfolio Choice under Inflation: Are Popular Recommendations Consistent with Rational Behavior?," Working Papers 2001-6, Copenhagen Business School, Department of Finance. [Downloadable!]
  18. Joseph G. Haubrich, 1999. "Term structure economics from A to B," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-9. [Downloadable!]
  19. Ben R. Craig & Joseph G. Haubrich, 2003. "Pricing kernels, inflation, and the term structure of interest rates," Working Paper 0308, Federal Reserve Bank of Cleveland. [Downloadable!]
  20. Ahmad Telfah, . "Strategic Asset Allocation in Stochastic Environment And Incomplete Markets: Evidence on Horizon And Hedging Effects," API-Working Paper Series 0603, Arab Planning Institute - Kuwait, Information Center. [Downloadable!]
  21. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  22. Pierre Collin-Dufresne & Christopher S. Jones & Robert S. Goldstein, 2004. "Can Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatility," NBER Working Papers 10756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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