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Are Expected Inflation Rates and Expected Real Rates Negatively Correlated? A Long‐Run Test of the Mundell‐Tobin Hypothesis
Author(s) -
Shrestha Keshab,
Chen ShengSyan,
Lee Chengfew
Publication year - 2002
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.t01-1-00020
Subject(s) - economics , cointegration , inflation (cosmology) , fisher hypothesis , real interest rate , monetary economics , interest rate , econometrics , index (typography) , keynesian economics , physics , theoretical physics , world wide web , computer science
Some empirical evidence suggests that the expected real interest and expected inflation rates are negatively correlated. This hypothesis of negative correlation is sometimes known as the Mundell‐Tobin hypothesis. In this article we reinvestigate this negative relation from a long‐term point of view using cointegration analysis. The data on the historical interest rate on T‐bills and the inflation rate indicate that the Mundell‐Tobin hypothesis does not hold in the long run for the United States, the United Kingdom, and Canada. We also obtain similar results using the real interest rate on index‐linked gilt traded in the United Kingdom.