Working Paper: NBER ID: w1543
Authors: James A. Wilcox
Abstract: The central goverment now issues both nominal and iflation indexed long-term bonds in the United Kingdom. The difference in their yields provides one measure of the long-term expevted rate of inflation. The evidence suggests that higher long-term, expected , real yields are associated with forecasts of higher income, with tigher monetary policy, and with positive aggregate supply shocks. Changes in the short-termgrowth rate of the monbetary base, which presumably capture the so-called liquidity effect on the short-terminterst rates, do not perceptibly alterlong-term real rates. Long-term real rates also appear to be unaffected by the rate of expected inflation. Comparison with nominal interest rate equiation estimates reveals that conclusions about the effect of all variables are extremely sensitive to the choice of a proxy for expected long-term inflation.
Keywords: long-term real interest rates; UK indexed bond market; expected inflation
JEL Codes: E43; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher income forecasts (F37) | higher long-term expected real yields (E43) |
| tighter monetary policy (E52) | higher real yields (E43) |
| positive aggregate supply shocks (E00) | higher real yields (E43) |
| changes in growth rate of monetary base (E50) | long-term real rates (E43) |