A COMPARISON OF ALTERNATIVE REAL RATE ESTIMATES†
| DOI | http://doi.org/10.1111/j.1468-0084.1988.mp50003005.x |
| Author | Kajal Lahiri,Mark Zaporowski |
| Date | 01 August 1988 |
| Published date | 01 August 1988 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 50,3(1988)
0305-9049 S3.00
A COMPARISON OF ALTERNATIVE REAL
RATE ESTIMATESt
Kajal Lahiri and Mark Zaporowski
I. INTRODUCTION
Current research dealing with the estimation of ex ante real interest rates in
the US has used two alternative approaches to model inflation expectations,
viz, the rational expectations hypothesis (REH) and the use of survey data.
Under REH, the ex post real interest rate is simply the ex ante real rate plus a
random inflation forecast error. Mishkin (1981) and Fama and Gibbons
(1984) describe how the ex ante real rate can be estimated by using the ex
post real rate as its observable proxy. The expected inflation rate is then
obtained by subtracting the estimated ex ante real rate from the nominal rate.
Recent studies which have utilized the survey data approach include Peek
and Wilcox (1983), Wilcox (1983), Makm and Tanzi (1984), Peek (1982),
Melvin (1982) and Levi and Makin (1979). Here, the emphasis is on quanti-
fying the impact of price expectations, fiscal/monetary policies and other
macroeconomic variables on the real rate in the context of a reduced form
interest rate equation explicitly derived from a structural macroeconomic
model. These studies have used Livingston's survey data directly as an
unbiased measure of true inflation expectations. The estimated ex ante real
rate obtained from the use of this approach is quite different from the same
obtained by using the REH approach. A simple comparison of reported real
rates in Canson (1977) or Makin and Tanzi (1984) with those in Mishkin
(1981) or Antoncic (1986)will make this point clear. As we will illustrate, the
mean of the after-tax ex ante real rate implied by the Livingston data using
12-month Treasury bill rates over the period 1952-79 is 0.263 (with stan-
dard deviation 1.49) whereas the same using a Fama-Gibbons (1984) type of
REH model is - 1.05 (with standard deviation 2.34). The mean of the one-
year ahead inflation forecasts from the Livingston survey over the same
period is 2.71 (standard deviation 2.61) whereas the mean inflation forecasts
t Partial financial support was provided by the National Science Foundation under grant
SES-8208900 at SUNY (Albany) and the Canisius College School of Business. We would like
to thank an anonymous referee and the Editor for their helpful comments.
Huizinga and Mishkin (1985) and Litterman and Weiss (1985) have found evidence in
favour of an autoregressive process for the ex ante real rate with AR coefficients significantly
less than one.
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