Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices

David Barr and John Campbell

No 5821, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper estimates expected future real interest rates and inflation rates from observed prices of UK government nominal and index-linked bonds. The estimation method takes account of imperfections in the indexation of UK index-linked bonds. It assumes that expected log returns on all bonds are equal, and that expected real interest rates and inflation follow simple time-series processes whose parameters can be estimated from the cross-section of bond prices. The extracted inflation expectations forecast actual future inflation more accurately than nominal yields do. The estimated real interest rate is highly variable at short horizons, but comparatively stable at long horizons. Changes in real rates and expected inflation are strongly negatively correlated at short horizons, but not at long horizons.

JEL-codes: E31 E43 (search for similar items in EconPapers)
Date: 1996-11
Note: AP ME
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Citations: View citations in EconPapers (36)

Published as Journal of Monetary Economics, Vol. 39 (August 1997): 361-383.

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Related works:
Working Paper: Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices (1997)
Working Paper: Inflation, real interest rates and the bond market: a study of UK nominal and index-linked Government bond prices
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