Is the real interest rate stable?

Article Abstract:

Univariate time-series models for consumption, nominal interest rates, and prices each appear to have a single unit root before 1979. If nominal interest rates have a unit root but inflation and inflation forecast errors do not, then ex ante real interest rates have a unit root and are therefore nonstationary. This deduction does not depend on the properties of the unobservable ex post observed real return, which combines the ex ante real interest rate and inflation-forecasting errors. The unit-root characteristic of real interest rates is puzzling from at least two perspectives: many models imply that the growth rate of consumption and the real interest rate should have similar time series characteristics; also, nominal returns for other assets (e.g.; stocks and bonds) appear to have different time-series properties from those of treasury bills. (Reprinted by permission of the publisher.)

Inflation (Finance), Consumption (Economics), Economic forecasting, Inflation (Economics)

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The purchasing power of money and nominal interest rates: a re-examination

Article Abstract:

While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time-series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market. (Reprinted by permission of the publisher.)

Analysis, Economic research, Prices

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Explaining forward exchange bias ... intraday

Article Abstract:

Intraday interest rates are zero. Consequently, a foreign exchange dealer can short a vulnerable currency in the morning, close this position in the afternoon, and never face an interest cost. This tactic might seem especially attractive in times of fixed-rate crisis, since it suggests an immunity to the central bank's interest rate defense. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intraday capital gain as long as no devaluation occurs. That is, currencies under attack should typically appreciate intraday. Using data on intraday exchange rate changes within the European Monetary System, we find this prediction is borne out. (Reprinted by permission of the publisher.)

Foreign exchange futures

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