Interest Rates and Inflation Revisited

Eugene F Fama

The Review of Asset Pricing Studies, 2019, vol. 9, issue 2, 197-209

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

Keywords: B26; C12; C58; E43; G12 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:9:y:2019:i:2:p:197-209.

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