1. WHO PUTS THE INFLATION PREMIUM INTO NOMINAL INTEREST RATES?
- Author
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FRIEDMAN, BENJAMIN M.
- Subjects
INTEREST rates ,PRICE inflation ,INSURANCE rates ,LOANS ,BONDS (Finance) ,INTEREST (Finance) ,CORPORATIONS ,BOND market ,CORPORATE bonds ,EFFECT of inflation on interest rates ,PREMIUMS (Retail trade) - Abstract
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]
- Published
- 1978
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