Inflation, Interest, and Relative Prices
University of Chicago, Chicago, IL 60637
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Business, 52 (April 1979) 183-209
In setting interest rates on treasury bills, the market appears to respond
only to the common part of the expected inflation rates of different goods.
However, there are seasonals in expected inflation rates which are different
for different goods. We suggest that these differential seasonals reflect
the real costs of providing different goods to the market at different times
of the year and hence are properly ignored by the market in setting interest
rates. Finally, there is increasing similarity in the movement of the unexpected
inflation rates of different goods for longer measurement intervals. In part,
we interpret this as the result of gradual reallocation of resources in response
to surprise shifts in supply or demand conditions. The tests use data for
the U.S. Consumer Price Index and its major sub-components from 1953 to 1977.
Key words: Inflation, Interest rates, Relative Prices
JEL Classifications: E31
Cited 28 times in the SSCI and SCOPUS through 2014
© Copyright 1979, University of Chicago
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