The Review of Asset Pricing Studies Vol. 9 No. 2 2019
Interest Rates and Inflation Revisited
Abstract
The continuously compounded (CC) interest rate on a one-month Treasury bill observed at the end of month t–1 is the sum of a CC expected real return and a CC expected inflation rate, Rt–1 = Et–1(rt) + Et–1(It). Two approaches are used to split Rt–1 between its two components. In the first, models for rt produce estimates of Et–1(rt), which are used to infer Et–1(It) as Rt–1 – Et–1(rt). The second approach models It to produce estimates of Et–1(It) and infer Et–1(rt) as Rt–1 – Et–1(It). By design, the estimates of Et–1(rt) and Et–1(It) from both approaches have the properties implied by rational bill prices. Received October 10, 2018; Editorial decision December 31, 2018 By Editor Jeffrey Pontiff
- DOI
- 10.1093/rapstu/raz004
- Volume
- 9
- Issue
- 2
- Pages
- 197-209
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref