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Inflation And The Mean‐Reverting Level Of The Short Rate

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  • ANDREAS RESCHREITER

Abstract

In this paper we investigate whether inflation causes the time‐varying mean‐reverting level in the Balduzzi et al. (Review of Economics and Statistics, Vol. 80, No. 1 (1998), pp. 62–72) short rate model. We find a time‐varying mean‐reverting level for the UK nominal short rate, but the real short rate mean reverts to a constant. This suggests a monetary source for the time‐varying mean‐reverting level in nominal short rate models. The time‐varying mean factor is closely related to market expectations about future inflation. This suggests that expected future inflation determines the mean‐reverting level of the nominal short rate.

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  • Andreas Reschreiter, 2010. "Inflation And The Mean‐Reverting Level Of The Short Rate," Manchester School, University of Manchester, vol. 78(1), pages 76-91, January.
    • Handle: RePEc:bla:manchs:v:78:y:2010:i:1:p:76-91
    DOI: 10.1111/j.1467-9957.2009.02129.x
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    Cited by:

    1. Stanislav Khrapov, 2011. "Pricing Central Tendency in Volatility," Working Papers w0168, Center for Economic and Financial Research (CEFIR).
    2. Nowman, Khalid Ben, 2010. "Modelling the UK and Euro yield curves using the Generalized Vasicek model: Empirical results from panel data for one and two factor models," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 334-341, December.
    3. Andreas Reschreiter, 2011. "Real and nominal UK interest rates, ERM membership, and inflation targeting," Empirical Economics, Springer, vol. 40(3), pages 559-579, May.

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