Working Paper: NBER ID: w4544
Authors: Lars E.O. Svensson
Abstract: The paper reviews the theoretical foundations of the use of forward interest rates to infer expected future rates of interest, inflation, currency depreciation and inflation differentials. Forward rates are related to these expected future variables via combinations of term, inflation and foreign exchange risk premia. A unified derivation, discussion and comparison of these premia is provided under both general and specific assumptions, as well as some comments on empirical estimation.
Keywords: forward interest rates; inflation; currency depreciation; risk premia
JEL Codes: E43; E52; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward rates (E43) | expected future interest rates (E43) |
| forward rates (E43) | expected future inflation rates (E31) |
| difference between nominal and real forward rates (E43) | expected inflation risk premium (E31) |
| difference between domestic and foreign forward rates (F31) | expected future depreciation rate of domestic currency (F31) |
| forward rates (E43) | expected differences in monetary policy (E49) |