Are expected inflation rates and expected real rates negatively correlated? A long-run test of the mundell-tobin hypothesis

Keshab Shrestha, Sheng Syan Chen, Cheng Few Lee

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)305-320
Number of pages16
JournalJournal of Financial Research
Volume25
Issue number3
DOIs
StatePublished - Sep 2002

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance

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