Hostname: page-component-7b7567c8c-kwt9d Total loading time: 0 Render date: 2026-11-14T00:45:41.417Z Has data issue: false hasContentIssue false
  • English
  • Français

Inflation Forecast Errors and Time Variation in Term Premia

Published online by Cambridge University Press:  06 April 2009

Werner F. M. De Bondt and
Mary M. Bange
Get accessRights & Permissions [Opens in a new window]

Abstract

The expectations theory of the term structure is well known to give wrong signals as to the future course of long-term interest rates. One explanation involves rational time-varying term premia. However, the “anomaly” may also be due to inflation forecast errors. We study survey forecasts of inflation. It seems that the respondents' forecasts are insufficiently adaptive. Interest rates reflect expectations similar to the inflation forecasts. As a result, past survey forecast errors reliably predict premia on U.S. Government Bonds.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 4 , December 1992, pp. 479 - 496
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Alesina, A. “Macroeconomics and Politics.” In Macroeconomics Annual 1988, Fischer, S., ed. Cambridge, MA: MIT Press (1988).Google Scholar
Backus, D., and Driffill, J.. “Inflation and Reputation.” American Economic Review, 75 (06 1985), 530–538.Google Scholar
Barsky, R. B. “The Fisher Hypothesis and the Forecastability and Persistence of Inflation.” Journal of Monetary Economics, 19 (01 1987), 3–24.CrossRefGoogle Scholar
Barsky, R. B., and De Long, J. B.. “Forecasting Pre-World War I Inflation: The Fisher Effect Revisited.” Working Paper, NBER #2784 (1988).CrossRefGoogle Scholar
Batchelor, R. A., and Dua, P.. “The Accuracy and Rationality of UK Inflation Expectations: Some Quantitative Evidence.” Applied Economics, 19 (06 1987), 819–828.CrossRefGoogle Scholar
Benninga, S., and Protopapadakis, A.. “Real and Nominal Interest Rates under Uncertainty: The Fisher Theorem and the Term Structure.” Journal of Political Economy, 41 (10 1983), 856–867.CrossRefGoogle Scholar
Bierwag, G. O., and Grove, M. A.. “Aggregate Koyck Functions.” Econometrica, 34 (10 1966), 828–832.CrossRefGoogle Scholar
Brown, B. W., and Maital, S.. “What Do Economists Know? An Empirical Study of Expert Expectations.” Econometrica, 49 (03 1981), 491–504.CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “A Simple Account of the Behavior of Long-Term Interest Rates.” American Economic Review, 74 (05 1984), 44–48.Google Scholar
Carlson, J. G. “A Study of Price Forecasts.” Journal of Economic and Social Measurement, 6 (1977), 27–56.Google Scholar
Caskey, J. “Modeling the Formation of Price Expectations: A Bayesian Approach.” American Economic Review, 75 (09 1985), 768–776.Google Scholar
Clarida, R. H., and Friedman, B. M.. “The Behavior of U.S. Short-Term Interest Rates since October 1979.” Journal of Finance, 39 (07 1984), 671–682.Google Scholar
Cox, J. C.; Ingersoll, J. E. Jr,; and Ross, S. A., “A Theory of the Term Structure of Interest Rates.” Econometrica, 35 (03 1985), 385–4O8.CrossRefGoogle Scholar
Darby, M. R. “The Financial and Tax Effects of Monetary Policy on Interest Rates.” Economic Inquiry, 14 (06 1975), 259–269.Google Scholar
Engle, R. F.; Lilien, D. M.; and Robins, R. P.. “Estimating Time-Varying Risk Premia in the Term Structure: The ARCH-M Model.” Econometrica, 55 (05 1987), 391–407.CrossRefGoogle Scholar
Fama, E. F. “Forward Rates as Predictors of Future Spot Rates.” Journal of Financial Economics, 3 (10 1976a), 361–377.CrossRefGoogle Scholar
Fama, E. F. “Inflation Uncertainty and Expected Returns on Treasury Bills.” Journal of Political Economy, 84 (06 1976b), 427–448.CrossRefGoogle Scholar
Fama, E. F. “Term Structure Forecasts of Interest Rates, Inflation, and Real Returns.” Working Paper, Graduate School of Business, Univ. of Chicago (1988).Google Scholar
Fama, E. F., and Gibbons, M. R.. “A Comparison of Inflation Forecasts.” Journal of Monetary Economics, 13 (05 1984), 327–348.CrossRefGoogle Scholar
Feige, E. L., and Pearce, D. K.. “Economically Rational Price Expectations: Are Innovations in the Rate of Inflation Independent of Innovations of Monetary and Fiscal Policy?” Journal of Political Economy, 84 (06 1976), 499–522.CrossRefGoogle Scholar
Figlewski, S., and Wachtel, P.. “The Formation of Inflationary Expectations.” Review of Economics and Statistics, 43 (02 1981), 1–10.CrossRefGoogle Scholar
Fisher, I.The Money Illusion. New York: Adelphi Co. (1928).Google Scholar
Fisher, I.The Theory of Interest. Clifton, NJ: A. M. Kelley (1965).Google Scholar
Frankel, J. A., and Froot, K. A.. “Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations.” American Economic Review, 77 (03 1987), 134–153.Google Scholar
Friedman, B. M. “Optimal Expectations and the Extreme Information Assumptions of Rational Expectations Macromodels.” Journal of Monetary Economics, 5 (01 1979), 23–41.CrossRefGoogle Scholar
Friedman, B. M. “Interest Rate Expectations versus Forward Rates: Evidence from an Expectations Survey.” Journal of Finance, 34 (08 1979), 965–973.Google Scholar
Friedman, M., and Schwartz, A. J.. Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975. Chicago: National Bureau of Economic Research (1982).CrossRefGoogle Scholar
Froot, K. A. “New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates.” Journal of Finance, 44 (06 1989), 283–305.CrossRefGoogle Scholar
Gibson, W. E. “Interest Rates and Inflationary Expectations: New Evidence.” American Economic Review, 62 (12 1972), 854–865.Google Scholar
Hafer, R. W., and Hein, S. E.. “On the Accuracy of Time-Series, Interest Rate and Survey Forecasts of Inflation.” Journal of Business, 58 (10 1985), 377–398.CrossRefGoogle Scholar
Hansen, L. P., and Hodrick, R. J.. “Forward Exchange Rates and Optimal Predictors of Future Spot Rates: An Econometric Analysis.” Journal of Political Economy, 88 (10 1980), 829–853.CrossRefGoogle Scholar
Hasbrouck, J. “Stock Returns, Inflation, and Economic Activity: The Survey Evidence.” Journal of Finance, 39 (12 1984), 1293–1310.CrossRefGoogle Scholar
Harvey, C. “The Real Term Structure and Consumption Growth.” Journal of Financial Economics, 22 (12 1988), 305–333.CrossRefGoogle Scholar
Huizinga, J., and Mishkin, F. S.. “Inflation and Real Interest Rates on Assets with Different Risk Characteristics.” Journal of Finance, 39 (07 1984), 699–714.CrossRefGoogle Scholar
Huizinga, J. “Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates.” Working Paper, NBER #1678 (1984).Google Scholar
Jacobs, R. L., and Jones, R. A.. “Price Expectations in the United States: 1947–1975.” American Economic Review, 70 (06 1980), 269–277.Google Scholar
Jonung, L., and Laidler, D., “Are Perceptions of Inflation Rational? Some Evidence from Sweden.” American Economic Review, 78 (12 1988), 1080–1087.Google Scholar
Keane, M. P., and Runkle, D. E.. “Testing the Rationality of Price Forecasts: New Evidence from Panel Data.” American Economic Review, 80 (09 1990), 714–735.Google Scholar
Macaulay, F. A.The Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1865. New York: National Bureau of Economic Research (1938).Google Scholar
Mankiw, N. G. “The Term Structure of Interest Rates Revisited.” Brookings Papers on Economic Activity (1, 1986), 61–96.CrossRefGoogle Scholar
Mankiw, N. G., and Summers, L. H.. “Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?” Brookings Papers on Economic Activity (1, 1984), 223–242.CrossRefGoogle Scholar
Mishkin, F. S. “Are Market Forecasts Rational?” American Economic Review, 71 (06 1981), 295–306.Google Scholar
Mishkin, F. S. “The Real Interest Rate: An Empirical Investigation.” Working Paper, NBER #622 (1981).CrossRefGoogle Scholar
Mishkin, F. S. “What Does the Term Structure Tell Us about Future Inflation?” Working Paper, NBER #2626 (1988).CrossRefGoogle Scholar
Mullineaux, D. J. “On Testing for Rationality: Another Look at the Livingston Price Expectations Data.” Journal of Political Economy, 86 (04 1978), 329–336.CrossRefGoogle Scholar
Muth, J. F. “Optimal Properties of Exponentially Weighted Forecasts.” Journal of the American Statistical Association, 55 (06 1960), 299–306.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (05 1987), 703–708.CrossRefGoogle Scholar
Pearce, D. K. “Comparing Survey and Rational Measures of Expected Inflation.” Journal of Money, Credit, and Banking, 11 (11 1979), 447–456.CrossRefGoogle Scholar
Peek, J., and Wilcox, J. A.. “The Postwar Stability of the Fisher Effect.” Journal of Finance, 38 (09 1983), 1111–1124.CrossRefGoogle Scholar
Pesando, J. E. “A Note on the Rationality of the Livingston Price Expectations.” Journal of Political Economy, 83 (08 1975), 849–858.CrossRefGoogle Scholar
Shiller, R. J. “The Volatility of Long Term Interest Rates and Expectations Models of the Term Structure.” Journal of Political Economy, 87 (12 1979), 1190–1219.CrossRefGoogle Scholar
Shiller, R. J.; Campbell, J. Y.; and Schoenholtz, K. L.. “Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates.” Brookings Papers on Economic Activity (1, 1983), 173–217.CrossRefGoogle Scholar
Shiller, R. J., and McCulloch, J. H.. “The Term Structure of Interest Rates.” In Handbook of Monetary Economics, Friedman, B. M. and Hahn, F. H., eds. Amsterdam: North-Holland Publ. (1990).Google Scholar
Sterman, J. D. “Expectation Formation in Behavioral Simulation Models.” Behavioral Science, 32 (07 1987), 190–211.CrossRefGoogle Scholar
Summers, L. H. “The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect.” In Macroeconomics, Prices, and Quantities, Tobin, J., ed. Washington, D.C.: The Brookings Institution (1983).Google Scholar
Theil, H.Applied Economic Forecasting. Amsterdam: North-Holland Publ. (1966).Google Scholar
White, H. “A Heteroscedasticity-Consistent Matrix Estimator and Direct Test for Heteroscedasticity.” Econometrica, 48 (05 1980), 817–838.CrossRefGoogle Scholar
Zarnowitz, V., and Lambros, L. A.. “Consensus and Uncertainty in Economic Prediction.” Journal of Political Economy, 95 (06 1987), 591–621.CrossRefGoogle Scholar