University of Washington, Seattle, WA
and National Bureau of Economic Research

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G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

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The American Economic Review, 67 (June 1977) 478-486

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We argue that the variability of unexpected inflation makes it difficult to measure variability in the ex ante real rate of interest using short-term inflation and interest rates in the U.S., as in Fama [1975]. Using more powerful tests, we show that there is reliable evidence of variation in ex ante real interest rates in the U.S. from 1953-71. We also estimate the variability of the ex ante real rate under several assumptions about its relation with the unexpected inflation rate.

Key words: Interest rates, Inflation, ARIMA, Composite predictor

JEL Classifications: C22, E31, E43

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Cited 163 times in the SSCI through 2007

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© Copyright 1977, American Economics Association

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