On Testing the Hypothesis that the Real Rate of Interest is Constant
University of Washington, Seattle, WA
and National Bureau of Economic Research
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
The American Economic Review, 67 (June 1977) 478-486
We argue that the variability of unexpected inflation makes it difficult
to measure variability in the ex ante real rate of interest using short-term
inflation and interest rates in the U.S., as in Fama [1975]. Using more powerful
tests, we show that there is reliable evidence of variation in ex ante
real interest rates in the U.S. from 1953-71. We also estimate the
variability of the ex ante real rate under several assumptions about its
relation with the unexpected inflation rate.
Key words: Interest rates, Inflation, ARIMA, Composite predictor
JEL Classifications: C22, E31, E43
Cited 133 times in the SSCI through April 1996
© Copyright 1977, American Economics Association
Return to Publications Page