Are Expected Inflation and Expected Real Rates Negatively Correlated? A Long-Run Test of the Mundell-Tobin Hypothesis
Resource
Journal of Financial Research 25 (3): 305-320
Journal
Journal of Financial Research
Journal Issue
25
Pages
305-320
Date Issued
2002-09
Author(s)
Abstract
Some empirical evidence suggests that the expected real interest and expected inflation rates are negatively correlated. This hypothesis of negative correlation is sometimes known as the Mundell-Tobin hypothesis. In this article we reinvestigate this negative relation from a long-term point of view using cointegration analysis. The data on the historical interest rate on T-bills and the inflation rate indicate that the Mundell-Tobin hypothesis does not hold in the long run for the United States, the United Kingdom, and Canada. We also obtain similar results using the real interest rate on index-linked gilt traded in the United Kingdom. © 2017 Wiley. All rights reserved.
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Type
journal article
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