Discussion Paper Details

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Title: Forward Interest Rates as Indicators of Inflation Expectations

Author(s): Paul Söderlind

Publication Date: December 1995

Keyword(s): Forward Rates, Inflation Expectations and Real Interest Rates

Programme Area(s): International Macroeconomics

Abstract: Forward interest rates have become popular indicators of inflation expectations. The usefulness of this indicator depends on the relative volatility and the correlation of inflation expectations and expected real interest rates. This paper studies US and UK data, using a range of different tools and data sets. The forward rate rule performs reasonably well, in spite of significant movements in the expected real interest rate. The reason is that the 'noise' that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions.

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Bibliographic Reference

Söderlind, P. 1995. 'Forward Interest Rates as Indicators of Inflation Expectations'. London, Centre for Economic Policy Research.