Working Paper: NBER ID: w0818
Authors: John H. Makin
Abstract: This paper investigates the hypothesis that surprise changes in the money supply and anticipated inflation (the Mundell-Tobin effect) are both inversely related to the expected real interest rate. The two novel aspects of the investigation are tests of the hypothesized impact of money surprises on real rates while simultaneously testing the Mundell-Tobin hypothesis and estimation employing transfer function methodology developed by Box and Jenkins (1970). The transfer function enables the investigator to entertain the hypothesis that residuals may not follow a simple AR-1 process, as is usually assumed in corrections for correlated residuals, but rather may be appropriately represented by a more complex ARMA process. Based on quarterly data from 1959-1 - 1980-IVY results obtained constitutes failure to reject either an inverse relationship between money surprises and expected real interest or an inverse relationship between anticipated inflation and expected real interest. These findings do not constitute a rejection of market efficiency.
Keywords: real interest rates; money supply; anticipated inflation
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| surprise changes in the money supply (E59) | expected real interest rates (E43) |
| anticipated inflation (E31) | expected real interest rates (E43) |