Real Interest, Money Surprises and Anticipated Inflation
This paper investigates the hypothesis that surprise changes in the money supply and anticipated inflation (the Mundell-Tobin effect) are both inversely related to the expected real interest rate. The two novel aspects of the investigation are tests of the hypothesized impact of money surprises on real rates while simultaneously testing the Mundell-Tobin hypothesis and estimation employing transfer function methodology developed by Box and Jenkins (1970). The transfer function enables the investigator to entertain the hypothesis that residuals may not follow a simple AR-1 process, as is usually assumed in corrections for correlated residuals, but rather may be appropriately represented by a more complex ARMA process. Based on quarterly data from 1959-1 - 1980-IVY results obtained constitutes failure to reject either an inverse relationship between money surprises and expected real interest or an inverse relationship between anticipated inflation and expected real interest. These findings do not constitute a rejection of market efficiency.
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autocorrelated behavior Bureau of Economic changes in anticipated Chi-Square test statistic coefficient on anticipated cross correlations dependent variable Economic Research equation 1.4 equilibrium Exchange Rates expected real interest expected real rate Fama and Gibbons Grossman hypothesis of constancy hypothesis that residuals hypothesized impact hypothesized negative impact impact of anticipated impact of money inflation rate inflation uncertainty inflationary expectations inversely related Jacob Mincer Jeffrey Sachs Levi and Makin Livingston survey data measures of money Michael Bruno Mishkin monetary policy monetary shocks money supply money surprise term Mundell Mundell-Tobin effect Mundell-Tobin hypothesis National Bureau NBER nominal interest rates overall pated inflation percent price stickiness prises procedure quarter of 1981 quarterly data rate of interest real interest rate relationship between money rise in anticipated Rudiger Dornbusch sample period significance level significant negative impact Standard Deviation standard errors subsequent reversal suggests SURPRISES AND ANTICIPATED surprises on real Tobin effect volatility of expected white noise zero