Forward Interest Rates as Indicators of Inflation Expectations

Paul Söderlind

No 1313, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Forward interest rates have become popular indicators of inflation expectations. The usefulness of this indicator depends on the relative volatility and the correlation of inflation expectations and expected real interest rates. This paper studies US and UK data, using a range of different tools and data sets. The forward rate rule performs reasonably well, in spite of significant movements in the expected real interest rate. The reason is that the 'noise' that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions.

Keywords: Forward Rates; Inflation Expectations; Real Interest Rates (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 G12 (search for similar items in EconPapers)
Date: 1995-12
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Forward Interest Rates as Indicators of Inflation Expectations (1997)
Working Paper: Forward Interest Rates as Indicators of Inflation Expectations (1995)
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