On Testing the Hypothesis that the Real Rate of Interest is Constant


Charles R. Nelson

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


G. William Schwert

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


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


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


Cited 196 times in the SSCI and SCOPUS through 2016
© Copyright 1977, American Economics Association

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