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Inflation Expectations, Interest Rates and Arbitrary Income Transfers

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  • Tony Makin

Abstract

Unexpected inflation, disinflation or deflation cause arbitrary income transfers between an economy's borrowers and lenders. This redistribution results from distorted real interest rates that are too high when price level changes are over‐predicted and too low when they are under‐predicted. This article shows that in Australia's case, inflation expectations were mostly biased upwards throughout the 1990s, according to the Melbourne Institute of Applied Economic and Social Research series and to a new derived series based on bond yields, implying that real interest rates were too high over this time. In turn, this caused substantial arbitrary income transfers from debtors to creditors, estimated to have averaged up to 3 per cent of gross domestic product over the period.

Suggested Citation

  • Tony Makin, 2003. "Inflation Expectations, Interest Rates and Arbitrary Income Transfers," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 36(3), pages 283-290, September.
    • Handle: RePEc:bla:ausecr:v:36:y:2003:i:3:p:283-290
    DOI: 10.1111/1467-8462.00287
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    References listed on IDEAS

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    1. Gordon de Brouwer & Luci Ellis, 1998. "Forward-looking Behaviour and Credibility: Some Evidence and Implications for Policy," RBA Research Discussion Papers rdp9803, Reserve Bank of Australia.
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