Inflation and Unappreciated Interest
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Inflation and Unappreciated Interest
Credit and Capital Markets – Kredit und Kapital, Vol. 13 (1980), Iss. 2 : pp. 239–251
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Steindl, Frank G.
References
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Abstract
Inflation and Unappreciated Interest
This paper develops a multiperiod Fisherian model in which the nominal rate of interest rises by less than the current expected rate of inflation in the presence of complete, instantaneous adjustment in the loanable funds market. Basic to the model is the motion of different time rates of expected inflation. | The behavior of the nominal rate of interest when price expectations may be different in various periods is the central problem considered. In such a case, the analytic expression of the nominal rate is more complex than the famous Fisherian i=o+n-+ or (o=real rate and nr = expected inflation rate). The relation between the nominal and real rate is shown to depend on the moderation, constancy or exacerbation of price expectations. In particular, the model establishes that the nominal rate of interest rises by less than the present anticipated rate of inflation if future inflation rates are expected to moderate. In the special case where a constant rate of inflation is anticipated, the expression for the nominal rate of interest reduces to the famous Fisherian equation. The paper then presents the results of an attempt to measure the course of inflationary expectations in order to assess the plausibility of the model. The implicit forward rates in the observed term structure are used, Declining forward rates are shown to imply expectations of declining rates of inflation. For monthly term structure data averaged over the business cycle, the evidence indicates that inflationary expectations are moderating.