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This paper investigates the effect of inflation on a firm's investments in fixed assets. When future prices are certain, inflation affects the present value of depreciation tax shields, and the impact of inflation on the choice between different lived assets is non-monotonic. Future asset price uncertainty creates a valuable switching option and benefits shorter-lived assets. [ABSTRACT FROM AUTHOR]

This paper demonstrates that the response of nominal interest rates to changes in inflationary expectations should lie between that predicted by the "Fisher" and "Darby" effects. The exact nature of the response will depend on the relative size of the income and capital gains tax rates, and the relative size of the derivatives of investment and savings to their respective after-tax real rates. The other major conclusion of this paper is that capital gains taxation offsets the negative effect on investment produced by treating depreciation on a historic rather than a replacement cost basis. [ABSTRACT FROM AUTHOR]

This article presents a discussion of an article that examined the joint behavior of price-earnings ratios, nominal interest rates and inflation. The author asserts that the paper may have prematurely expressed enthusiasm over the hypothesis that investors in many countries make two specific types of valuation errors. The author notes that the valuation error hypothesis has implications that were not examined, namely that ex post real rates of return to shareholders should, on average, actually be positively related to ex ante expected inflation rates. He also notes that the failure to account for declines in the real value of nominal liabilities has implications that went unexamined as well.

A great deal of recent research has been concerned with the effect of inflation on economic variables such as the interest rate, the premium for risk, and the value of the firm. Many of these articles have argued that, except for depreciation effects, the value of future investments in a world with taxes is unaffected by a change in the rate of inflation. Since it is difficult to discuss in depth the work of many writers, we will zone in on the reasoning of this type employed in only one paper, the recent article by Gandolfi. However, we believe that the discussion presented here has implications formerly other articles as well. As is common in the literature, Gandolfi builds his macromodel in two steps. First, he sets up the investment, consumption and other schedules as functions of simple parameters such as income and the rate of interest. Second, he combines the schedules to determine the equilibrium values of these parameters. This note is only concerned with part of the first step since we merely want to reevaluate the investment schedule. Since we believe that the use by Gandolfi and others of the IS/LM and/or the neo-classical growth model for the second step is correct, we leave it to future research to place our amended investment schedule in the appropriate model. [ABSTRACT FROM AUTHOR]

No theoretical insight has had as much effect on the understanding of movements in interest rates as the distinction lrving Fisher (1896) made between nominal and real interest rates. His theory postulates that the nominal rate of interest will be equal to the real rate of interest plus the anticipated or expected rate of change in prices. If the equilibrium real rate is stable, or if it is not affected by changes in the rate of change of prices, then a rise in the expected rate of inflation will cause an equivalent rise in the nominal rate of interest. In this case, both the saving supply function and the investment demand function remain fixed with respect to the real interest rate, but shift upward with respect to the nominal interest rate by an amount equal to the rise in the expected inflation rate. Fisher's theory has formed the basis of most recent empirical investigations into secular changes in interest rates. These studies have ignored the effect that the existence of income and corporate taxes might have on the "Fisher Effect." It is the purpose of this paper to develop a simple model of saving and capital accumulation and to investigate in terms of this model the impact that a change in the expected rate of inflation has on nominal and real interest rates when taxes are paid on interest income. [ABSTRACT FROM AUTHOR]

The spirit of the Brealey and Schaefer paper is one I find agreeable. It seeks to impose simplification on an exceedingly complicated problem--equilibrium in a multiperiod world with many assets and uncertain inflation. A valuation model based on a particular set of simplifying assumptions is proposed by Brealey and Schaefer for analyzing the equilibrium term structure of interest rates in this setting. Given the spirit of their paper, my discussion will consist mainly of comments on certain of the assumptions they employ. A major assumption of the paper is that the equilibrium expected real interest rate for every future period is known today. This would, strictly speaking, require that the production opportunity set for every future period be known and that every investor know the parameters of every other investor's utility function. Described in this fashion, the assumption seems heroic, and empirical evidence on this matter is mixed. However, Brealey and Schaefer want to focus on the effects of inflation uncertainty. [ABSTRACT FROM AUTHOR]

Stochastic dominance rules (SD) have been extended to the case where investors are allowed to borrow and lend at the riskless interest rate. Stochastic dominance rules with a riskless asset (SDR) are much more effective than SD rules. However, it seems that this benefit is eliminated by an uncertain inflation, since riskless assets become risky once uncertain inflation is considered. We prove in this paper that SDR criteria are valid also in the face of uncertain (and independent) inflation. Moreover, while the mean-variance (MV) efficient set increases with uncertain inflation, the stochastic dominance efficient sets decrease. [ABSTRACT FROM AUTHOR]

THERE ARE AT LEAST two statistically firm results regarding international money and capital markets. The first is the theory of interest rate parity is empirically valid for Euro interest rates [8]. The second is forward exchange rates are poor, very likely biased, predictors of future spot exchange rates. The former is a comforting finding in that it assures there are no unexploited arbitrage profits. The latter is troubling (to some) because it might be a symptom of an inefficient market. That interest rate parity holds suggests international exchange and money market arbitrageurs are fully exploiting all profit opportunities. They are behaving rationally. That forward exchange rates fail to predict future spot rates at least unbiasedly suggests the existence of some unknown mechanism which robs predictive ability. In a naive rational expectations view of the world, the failure of forward rates to be unbiased predictors of future spot rates implies either that there is some difference between interest rate pairs other than inflationary expectations, or that forward tares do not capture expected inflation differences in any simple way. This paper addresses the first issue. If there are differences in interest rate pairs which do not solely reflect expected inflation divergences, this must show up as a difference in real interest rates. Such could be the result of actual instantaneous real rates of identical risk being unequal in magnitude, or what is more likely, differences in term premia between interest rate pairs when periods greater than, say, one day are used in interest rate parity and forward rate prediction tests. If there are differential term premia in interest rate pairs of, say, one month or longer then forward exchange rates will mispredict the future spot exchange rate by that margin. [ABSTRACT FROM AUTHOR]

This paper reviews and extends some recent tests on the efficiency of nominal interest rates with respect to expected inflation. We show that Fama's [4] time series tests were in the right spirit but these tests cannot be relied on due to possible biases in the coefficients obtained and the Mundell effect. The work done by Fama and Gibbons [5] substantially improves on Fama's earlier work and leads one to conclude that nominal interest rates are efficient. We show that cross-sectional tests using international interest rates can also provide a good alternative test of efficiency. Results of those tests provide reasonable, although not completely conclusive support for the concept of nominal interest rates adjusting to expected inflation. [ABSTRACT FROM AUTHOR]

This paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971-80. The Fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world. Using interest rates as a proxy for expected inflation, our data provide consistent support for the Geske and Roll model whose basic hypothesis is that stock price movements signal (negative) revisions in inflationary expectations. Finally, a weak real interest rate effect was found for some of these countries. [ABSTRACT FROM AUTHOR]

The negative relationship between stock returns and (a) beginning-of-period short-term interest rates (b) contemporaneous changes in short-term interest rates, and (c) unanticipated inflation, were the subjects of this paper. We argue that relations (b) and (c) are really two ways to measure the same thing. Numerous explanations for the remaining relations have been offered by other authors, but only Nelson's [33] and Fama's [9] money demand explanation is logically consistent and it seems unable to fully explain all of the empirical phenomena. We offer a supplemental explanation consisting of the following argument: a random negative (positive) real shock affects stock returns which, in turn, signal higher (lower) unemployment and lower (higher) corporate earnings. This leads to lower (higher) personal and corporate tax revenues. Government expenditures do not change to accommodate the change in revenues so the Treasury's deficit increases (decreases). The Treasury responds by increasing (decreasing) borrowing from the public. The Federal Reserve System purchases some of the change in Treasury debt and eventually pays for it by expanding (contracting) the growth rate of base money. Higher (lower) inflation is induced by the altered money base growth rate. Rational investors realize that a random real shock signalled by the stock market will trigger this chain of fiscal and monetary responses. Thus, they alter the prices of short-term securities contemporaneously with the stock return signal. To the extent that an increased (decreased) deficit, triggered by a real shock, is not expected to be "monetized" by the Federal Reserve, the Treasury's increased (decreased) supply of debt securities can also cause an increase (decrease) in real interest rates. Investors decide collectively on whether a particular stock return signifies a change in real rates, in expected inflation rates, or in both. Regardless of the mix between real rate and expected inflation, nom... [ABSTRACT FROM AUTHOR]

This paper provides further evidence on the distributional impact of interest rate ceilings on the small saver. Cross-section data from the 1977 Consumer Credit Survey was used to estimate the implicit losses imposed on different income classes by government regulations. Our findings generally support earlier studies which found the implicit burden to be regressive among income classes. However, the degree of regressivity showed a marked decrease since 1970. These results may be explained by portfolio adjustments of households and financial innovations in response to deposit rate ceilings and accelerating inflation during the 1970s. [ABSTRACT FROM AUTHOR]

Fisher's original formulation an equilibrium relationship in which a nominal interest rate is equal to a real rate of interest plus the expected rate of inflation has stimulated considerable interest and research. Although many empirical studies have utilized a single equation distributed lag specification of past price changes (which might be induced from a rational expectations argument) as a proxy for "expectations," T. F. Cargill and R. A. Meyer have emphasized the necessity of a simultaneous equation structure if such distributed lags were to be employed. An alternative approach using Livingston's direct observations on expectations and allowing for the possibility of incomplete adjustment to expectations was employed by Cargill, W. Gibson and D. Pyle. These evolving improvements in conception of the empirical problem, data and econometric approach have led to a particularly interesting paper by K. Lahiri in which S. Turnovsky's expectations formation equations are coupled to the original Fisherian equation and then appropriate simultaneous equation techniques are applied to the resulting econometric relationships. From a slightly different perspective, E. Fama has emphasized the implication for market efficiency embedded in the interest rate and expected inflation relationship. All analyses to date rest on the assumption that the real rate of interest is constant over time. Thus, as Fama noted, empirical implications for market efficiency tests really constitute a test of the joint hypothesis of efficiency and a constant rate. Despite the advances in conception of the empirical problem, data improvements, and improvements in econometric technique, the question of variation in the real rate of interest and the possibility of incomplete adjustment to changes in the real rate as well as to expected inflation leaves the extent and stability of the Fisherian relationship far from a settled matter. In addition, a much richer class of hypotheses e... [ABSTRACT FROM AUTHOR]

This paper analyzes the emergence of the inflation premium in long-term interest rates as the explicit result of borrowers' and lenders' behavior in the bond market in response to expectations' of price inflation. By exploiting a structural modelling approach, this analysis seeks not only to estimate the magnitude of the inflation premium due to this portfolio behavior but also to identify the (in general differential) contributions to it of borrowers' and lenders' behavior. To anticipate, the empirical results suggest that the equilibrium portfolio responses to a marginal 1% of expected price inflation change the nominal long-term interest rate by about 2⁄3%, and that this premium reflects approximately equal responses by borrowers and lenders. [ABSTRACT FROM AUTHOR]

The objective of this paper is to estimate the relationship between nominal rates of interest and percentage changes in the price level over the period from 1861 through 1970 with several distributed lag estimators. A large number of subperiods will be investigated using monthly, quarterly, and annual observations on prices and interest rates. The evidence indicates that the hypothetical relationship between interest rates and price changes is not a well established empirical relationship as is often claimed in the professional literature. [ABSTRACT FROM AUTHOR]

This paper has attempted to show that more than the officially recognized inflation-adjustments are necessary before even the simplest financing ratios can meaningfully be compared over time. If these adjustments are made, the decline in profits and retained earnings after 1965 is far less than commonly measured and so is the increased reliance on external funds after 1968. Specifically it was argued that inflation-adjusted profits, retained earnings, and the gross flow of internal funds should include any reduction in real indebtedness. Adding this amount to the sum of retained earnings (including the IVA and CCA) and replacement-cost depreciation yields the correct measure of gross internal funds for purposes of financial analysis whether or not inflation premiums are fully reflected in interest rates. Correspondingly, that part of the increase in debt that merely goes to maintain the real value of past debt should be excluded from the external sources of funds if the relative importance of debt-financing is to be determined for periods with different inflation rates. While we certainly recognize that a rise in inflation rates and risk premiums can and probably does reduce the market value of the firm below the replacement cost of its assets in spite of the reduction in its real net indebtedness, such an outcome provides no justification for measuring the flow of internal funds incorrectly in the first place or for confusing nominal with real changes in net indebtedness. We are also aware that inflation in effect shortens the effective maturity or duration of the debt. As more frequent recourse to the credit market is required just to maintain real indebtedness or to finance the inflation premium in the interest rates paid by nonfinancial corporations, risks premiums may rise. Hence our point is not that a rise in the rate of inflation does not depress investment, but only that some of the most commonly cited reasons why it may do so may not apply at all... [ABSTRACT FROM AUTHOR]

Roll's argument is based on the theory of efficient markets. "Why," he asks, "should the price of a commodity not be bid up today if it is expected to be higher tomorrow?" The misleading aspect of this question is that it fails to distinguish between nominal and relative prices. This argument, however, only pushes the problem back a stage. Why don't the nominal prices of all storable commodities rise today to the levels expected tomorrow? This result is the one obtained in Roll's simple model. The answer is that the higher is the price level today, the lower is the level of real money balances today. Since real money balances provide a yield in production and consumption services, the holders of money balances will want to bid commodity prices up only to the point at which the cost of holding real balances--the real rate of interest plus the rate of increase of commodity prices--equals the marginal services yield on real balances. If the marginal services yield on real balances were for some reason to be zero, then the price level today would be bid up above tomorrow's expected price level so that the yield on money balances from deflation would equal the real rate of interest. [ABSTRACT FROM AUTHOR]

Carleton, Chambers and Lakonishok have motivated this paper by beginning with an idealized regulatory process in which shortfalls of expected returns on equity from the current cost of equity capital are made up by subsequent rate relief; these shortfalls can be generated by unanticipated inflation. The correction of the shortfall is viewed as a "social contract" whose risk will be reflected in the cost of equity capital. The evidence in Table 1 in the paper is inconsistent with all of the implications of "ideal" regulation and the deviations appear to increase over the sample period. The authors hypothesize that the non-observance of the "social contract" has increased investor risk and there should be an increase in the cost of equity capital. However, some bench mark must be identified so that increases in the cost of equity over and above those induced by increased expected rates of inflation can be identified. The bench mark used is the yield on zero-coupon Government bonds. The hypothesized positive relationship between the risk premium on equity and the level of interest rates will hold if there is no risk premium on debt or if it exists, it is independent of the level of interest rates. If Gordon and Halpern [1] are correct in that the bond risk premium depends upon the uncertainty in inflation rates which is related to the level of interest rates, then it is possible to observe an increase in the cost of equity at the same time as there is a decrease in the measured risk premium on equity. [ABSTRACT FROM AUTHOR]

This article presents the author's opinion on an article that examined ex ante real rates of interest. The author discusses how the research focused on the negative relationship between expected inflation, nominal interest rates and ex ante real returns. The author notes that while their findings are similar to other research conducted in this area, their conclusion in more pessimistic about financial assets as hedges against inflation.

Univariate time-series models for consumption, nominal interest rates, and prices each appear to have a single unit root before 1979. If nominal interest rates have a unit root but inflation and inflation forecast errors do not, then ex ante real interest rates have a unit root and are therefore nonstationary. This deduction does not depend on the properties of the unobservable ex post observed real return, which combines the ex ante real interest rate and inflation-forecasting errors. The unit-root characteristic of real interest rates is puzzling from at least two perspectives: many models imply that the growth rate of consumption and the real interest rate should have similar time-series characteristics; also, nominal returns for other assets (e.g., stocks and bonds) appear to have different times-series properties from those of treasury bills. [ABSTRACT FROM AUTHOR]

This paper examines the relation between the interest rate sensitivity of common stock returns and the maturity composition of the firm's nominal contracts. Using a sample of actively traded commercial banks and stock savings and loan associations, common stock returns are found to be correlated with interest rate changes. The co-movement of stock returns and interest rate changes is positively related to the size of the maturity difference between the firm's nominal assets and liabilities. [ABSTRACT FROM AUTHOR]

Given the importance of ex ante real interest rates to economic decision making, it is no surprise that much empirical research focuses on them.1 Several recent studies find that the ex ante real returns for short-term U.S. Treasury securities are not constant and are negatively correlated both with inflation and with nominal interest rates. This paper examines the extent to which these findings hold for assets of longer maturity, are robust with respect to the choice of price index, and are stable over time. [ABSTRACT FROM AUTHOR]

The article responds to the article "'Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest': A comment," by Herbert Taylor, which was published in the issue. The authors of this article claim that Taylor's comment has allowed them to clarify the meaning of the Fisher effect and show the unimportance of money in the measurement of it. They feel that additional but temporary effects that occur alongside inflation must be allowed if they are to isolate the true Fisher Effect. In order to do so they must control for the short-run effect of inflation expectations on real output, the Phillips Effect and the statistical association between inflation and inflation uncertainty.

The author discusses the article "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest," by Levi D. Maurice and John H. Makin published in an earlier issue of "The Journal of Finance." The author criticizes Makin and Maurice for misinterpreting the Fisher hypothesis, which they claimed to test by estimating from a small macroeconomic model, concluding that their empirical results were consistent with the Fisher hypothesis after correcting for the inflation-uncertainty effects. The model constructed by Levi and Makin is examined.

This paper studies the term structure of real rates, expected inflation, and inflation risk premia. The analysis is based on new estimates of the real term structure derived from the prices of index-linked and nominal debt in the U.K. I find strong evidence to reject both the Fisher Hypothesis and versions of the Expectations Hypothesis for real rates. The estimates also imply the presence of time-varying inflation risk premia throughout the term structure. [ABSTRACT FROM AUTHOR]

In an unstable economy, expectations of changes in price level and rate of exchange play a significant role in motivating the economic behavior of both households and firms. Several econometric studies attempted to predict future expectations on the basis of past observations. Such studies, however, are crucially dependent on the assumptions (1) that there has been a relationship between past performance and expectations, and (2) that the nature of this relationship is known. Another method for the estimation of expectations is the one which derives these expectations on the basis of the price structure of future markets. However, an examination of specific commodities traded on future markets does not provide meaningful estimates, since their future prices reflect, among other things, expected changes in relative prices. This problem can be circumvented by referring to future interest rates which can be derived from the market price structure of financial assets. This paper sets out the theoretical relationship between yields on unlinked and linked bonds, showing that it reflects market expectations of future rates of change in price level and exchange rate. A model is then used to show theoretically that it is possible to derive estimations of market expectations regarding such future rates of change by comparing the yields of unlinked bonds with the yields of bonds linked to the price level and the foreign exchange rate respectively, provided these bonds are identical in all other respects. [ABSTRACT FROM AUTHOR]

Discusses the stochastic characteristics of interest rates. Economic significance of bond prices. [ABSTRACT FROM AUTHOR]

Using a multivariate vector-autoregression (VAR) approach, this paper investigates causal relations and dynamic interactions among asset returns, real activity, and inflation in the postwar United States. Major findings are (1) stock returns appear Granger-causally prior and help explain real activity, (2) with interest rates in the VAR, stock returns explain little variation in inflation, although interest rates explain a substantial fraction of the variation in inflation, and (3) inflation explains little variation in real activity. These findings seem more compatible with Fama (1981) than with Geske and Roll (1983) or with Ram and Spencer (1983). [ABSTRACT FROM AUTHOR]

Changes in six-month bill rates over semiannual periods in the 1960s and 1970s are successfully related to expected changes and to surprises. The latter include unanticipated changes in expected inflation, in the growth of industrial production and base money, and in inflation uncertainty. Estimation of the basic equation through the middle of 1983 does not suggest any change in structure. Moreover the equation "explains" 60 percent of the extraordinarily high level of real rates since late 1980, largely owing to an excess of unexpected net increases in anticipated inflation over actual increases. Our estimates provide some support for the expectations theory; there appears to be information content in six-month forward rates. While this content is swamped by the impact of surprises in equations explaining rate changes in terms of forward rates alone, the content is clear when proxies for the surprises are included in the equations. [ABSTRACT FROM AUTHOR]

Short-term interest rates in the United States have been "too high" since October 1979 in the sense that both unconditional and conditional forecasts, based on an estimated vector autoregression model summarizing the prior experience, underpredict short-term interest rates during this period. Although a nonstructural model cannot directly answer the question of why this has been so, comparisons of alternative conditional forecasts point to the post-October 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short-term interest rates. This finding is consistent with the authors' earlier conclusion, based on analysis of a small structural macroeconometric model, that the high average level of interest rates has been due to a combination of slow growth of (nominal) money supply and continuing price inflation, which together have kept real balances small in relation to prevailing levels of economic activity. [ABSTRACT FROM AUTHOR]

Supply and demand functions for loanable funds are postulated for a no-inflation economy and equilibrium levels of saving, investment, and the interest rate are specified. Certainty and nondepreciating assets are assumed. An exogenous inflation rate is imposed upon this same economy and new equilibrium values for these same variables are established. The analysis is performed twice. The first time, a Modigliani-Miller [17] tax structure is assumed while the second analysis assumes a Miller-Scholes [15] tax structure. In both cases, inflation causes the nominal rate to increase by more than the inflation rate. The analysis is repeated assuming that investments live for one period and are then written off against taxable income at historical cost. In both tax structures, the level of saving and investment is a decreasing function of the inflation rate. [ABSTRACT FROM AUTHOR]

An increase in the anticipated rate of inflation causes distortions in the housing market due to a nonindexed tax system. Since nominal rather than real interest payments are tax deductible, an increase in inflation decreases the aftertax cost of capital for home-owners, which in turn increases the demand for housing and increases its real price. This tax gain is shown to be larger for rental housing than for owner-occupied housing. In a competitive market, this implies that although the real price of housing increases with a rise in anticipated inflation, real rental rates fall. [ABSTRACT FROM AUTHOR]

The article discusses the impact of inflationary expectations on the term structure of interest rates. Both real returns on capital and inflation expectations can affect the term structure, albeit in different ways. The author demonstrates that Modigliani and Such's "preferred habitat" interpretation holds when real returns on capital fluctuate. In this instance, liquidity premiums will adjust according to investors' and borrowers' preferences for long- or short-term lending and borrowing. When expectations for inflation change, activity in the long-term market ceases.

In the March 1970 issue of this journal, William E. Gibson attempted an empirical verification of the price-expectations effect on interest rates. The purpose of this note is to draw attention to some problems in the theoretical arguments made by Gibson, and to illustrate that the inferences made by Gibson are not warranted on the basis of his empirical results. [ABSTRACT FROM AUTHOR]

A simple story is told about the response of interest rates to anticipated changes in commodity prices. A consumer expects the dollar cost of apples to be twenty per cent higher next period than now. He could be induced to give up 100 apples for the promise of 105 apples next period but he would not part with ten dollars for a promise of less than $12.60 in repayment. Moral: The nominal (money) rate of interest is equal to the real (apple) rate plus the rate of inflation. This relation is named the Fisher effect after its originator and most distinguished proponent. It is one of the standard paradigms of monetary economics and is frequently used in explaining bond prices to spouses and physicists. Of the theoretical and empirical importance of the asserted relation there can be no doubt. The rate of interest has a central role in macrotheory, because it is a primary transmitter of both monetary and fiscal actions. For bond buyers and issuers, the course of inflation would seem to be at least as important as changes in default probability and in the real productivity of capital. [ABSTRACT FROM AUTHOR]

The article presents commentary and criticism on the report "The Impact of Low Interest Rates on the Economy," by Lester V. Chandler, included within the issue discussing the economic impact of monetary policy within the United States at the beginning of the post-World War II era. Chandler's criticism of the national credit policy is noted and challenged, suggesting that from a purely theoretical and principled standpoint, as opposed to retrospective analysis, the policy was sound. Suggestions that moderate increases in credit control would have been better are disputed, due to the scale of idle money held by the general public at the end of the war.

Responds to James McCollum's comment on empirical verification of the price-expectation effects on interest rates. Additional evidence provided by McCollums concerning the weakness of price-expectation effects in the 1960s based on the quarterly results of the United States experience; Difficulty in predicting actual prices in the 1950s than in the 1960s. [ABSTRACT FROM AUTHOR]

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the United States is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure. [ABSTRACT FROM AUTHOR]

We develop a method of measuring ex-ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, we directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. We find a negative correlation between ex-ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Mundell and Tobin, Darby and Feldstein, and Stulz. We also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty. [ABSTRACT FROM AUTHOR]

Interest in the behavior of the demand for money by firms has been stimulated in recent years, partly because of unsatisfactory empirical results obtained for firms or the business sector (see, e.g., Goldfeld, Laumas, and Wilbratte). The purpose of this study is to investigate empirically several issues concerning the demand for money by firms in an inflationary environment. [ABSTRACT FROM AUTHOR]

In the absence of inflation uncertainty, the distinguishing feature of bonds is that they have a known value at maturity so that the returns over any sub-periods are negatively correlated. It is this which gives bonds their unique hedging properties. When future rates of inflation are not known, these hedging properties become attenuated. In the particular case where the inflation rate is the only source of uncertainty and the required real return is independent of the expected inflation rate, bonds cease to have any value as hedges. The returns on any portfolio of bonds will in this case be serially independent and the investor can under reasonable conditions optimise over the coming period regardless of his maturity preferences. The importance of this myopia property is that we can make use of standard one-period portfolio analysis. It follows from our assumptions that the equilibrium rate of interest on a forward contract is equal to the expected spot rate plus a premium which is a function of known parameters. Although superficially similar to the usual liquidity premium, ours is strictly a risk premium that has nothing to do with maturity preferences and depends solely on the extent to which inflation uncertainty will be reduced. This equilibrium expression can be formulated in terms of the expected one-period holding return on a forward contract. In this case we have an expression that is formally identical to the two-factor asset pricing model, where the expected return from a forward contract is a linear function of the beta of the nominal return from the market portfolio. Any individual's equilibrium portfolio in forward contracts can be characterised as a weighted average of the market portfolio and the minimum variance portfolio, where the weights depend on his risk aversion relative to that of the market. One implication of this portfolio optimum is that as the degree of uncertainty about inflation increases, there is a corresponding reduction ... [ABSTRACT FROM AUTHOR]

The article focuses on the effects of inflation on security returns. The impact of inflation on capital markets demands new developments in the generally accepted models of security returns and capital market equilibria. The author reviews the evidence supporting this claim and suggests some modifications to conventional models and analytical frameworks that are required to effectively deal with the effects of inflation on markets. A theory explaining observed relations between inflation and equity market prices and returns is provided.

Two puzzling aspects of the behavior of interest rates are the response of the real rate of interest to changes in the supply of money and the response of the nominal rate of interest to changes in the expected rate of inflation. The empirical data suggest that, in contrast to the implication of the IS-LM model, the real rate of interest, after an initial decline (increase) in response to expansionary (contractionary) monetary policy and prior to a complete adjustment of commodity prices, experiences a complete return or "snap back" to its original-level. The data also indicate that, in contrast to the implication of neo-Classical theory, the nominal rate of interest, at least until several years or even decades have passed, changes by only a fraction of a change in the expected rate of inflation. In this analysis, the interest-induced wealth effect has been introduced into the analysis of three exogenous changes, two involving a change in the supply of money and one involving a change in the expected rate of inflation. The analysis of the effects of these changes, when the interest-induced wealth effect is introduced, provides an explanation of both the snap back response of the real rate of interest to a change in money and the delay in the response of the nominal rate to a change in inflationary expectations. [ABSTRACT FROM AUTHOR]

The article focuses on the relationship between money, income and prices in the short and long run. The article examines what the relationship between money, interest and prices when the restrictive assumption of zero homogeneity in prices is dropped. It is demonstrated in the article that in non-neutral systems the effect of a reduction in the money supply will result in a reduction in output and capital and quit likely an increase in prices. The article also aims to show the relevance of the long run view point to the current debate over the inflationary impact of monetary policy.

The article focuses on the derivation of proxies for real rates of interest through inflation expectations and reactions in capital markets. The foundations of the process put forth by Irving Fischer are reviewed. This study highlights liquidity preference and loanable funds as instruments for estimating inflation impacts on nominal bond yields through a capital market equilibrium approach. An estimation model for the expected real rate is derived and empirically tested with data from 1960-1971.

The article examines the impact of price and interest rate expectations on the demand for money in Canada. The authors present a demand function for money and estimate it in logarithmic fashion using quarterly observations from January, 1955 to December, 1967. Data include yields on Canadian government securities of three different maturities, and two separate measures for money. Results indicate that interest rates and income significantly affect the demand for real cash balances. Expectations for interest rates and prices were also significant factors.