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Consumption, Inflation Risk, and Real Interest Rates: An Empirical Analysis

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  • Chan, Louis K C

Abstract

The consumption-based asset pricing model is used to examine the relation between inflation and interest rates. To the extent that inflation is correlated with real consumption opportunities, expected real interest rates should incorporate a premium for inflation covariance risk. The empirical results suggest a statistically reliable premium for inflation covariability risk in short-term interest rates. Moreover, part of the time-series variation in inflation covariability risk is predictable. Copyright 1994 by University of Chicago Press.

Suggested Citation

  • Chan, Louis K C, 1994. "Consumption, Inflation Risk, and Real Interest Rates: An Empirical Analysis," The Journal of Business, University of Chicago Press, vol. 67(1), pages 69-96, January.
    • Handle: RePEc:ucp:jnlbus:v:67:y:1994:i:1:p:69-96
    DOI: 10.1086/296624
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    Cited by:

    1. Thomas C. Melzer, 1997. "To conclude: keep inflation low and, in principle, eliminate it," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-7.
    2. James R. Rhodes, 2006. "DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion," GRIPS Discussion Papers 07-05, National Graduate Institute for Policy Studies, revised Sep 2007.
    3. Amaefula C. G, 2016. "The Effects of Inflation and its Risk on Interest Rate: An Empirical Evidence from Nigeria," Economy, Asian Online Journal Publishing Group, vol. 3(2), pages 74-78.
    4. D’Amico, Stefania & Kim, Don H. & Wei, Min, 2018. "Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(1), pages 395-436, February.
    5. Guler, Bulent & Ozlale, Umit, 2005. "Is there a flight to quality due to inflation uncertainty?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 345(3), pages 603-607.
    6. Afsin Sahin & Volkan Ulke, 2015. "Farkli Belirsizlik Duzeylerinde Faiz Oraninin Makroekonomik Degiskenlere Etkileri : Turkiye Uzerine Etkilesimli Vektor Otoregresif Modeli Uygulamasi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(1), pages 65-93.
    7. E. Yuksel & Y. Akdi, 2009. "The effect of different inflation risks on interest rates of the US," Applied Economics Letters, Taylor & Francis Journals, vol. 16(2), pages 169-175.
    8. Hakan Berument & Zubeyir Kilinc & Umit Ozlale, 2005. "The Missing Link Between Inflation Uncertainty And Interest Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(2), pages 222-241, May.

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