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

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

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Title: Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices
Author: Barr, David; Campbell, John

Note: Order does not necessarily reflect citation order of authors.

Citation: Barr, David F., and John Y. Campbell. 1997. Inflation, real interest rates, and the bond market: a study of UK nominal and index-linked government bond prices. Journal of Monetary Economics 39, no. 3: 361-383.
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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.
Published Version: http://dx.doi.org/10.1016/S0304-3932(97)00027-5
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3163261

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  • FAS Scholarly Articles [7470]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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