[PEN-L:4878] Re: inflation expectations by class

[BILL MITCHELL <ECWFM@xxxxxxxxxxxxxxxxxxx>]

>
>Paul's question brings to mind another issue I've been wrestling with about
>"inflationary expectations" and that relates to the REAL interest rate.  By
>convention, an awful lot of time-series' on the real interest rate uses a 12
>(or nine) quarter average to estimate the "expected rate of inflation" which
>then is subtracted from the actual interest rate in question ---.  I,
>myself, have always believed that the EX POST real interest rate (prime or
>FFR less the experienced rate of inflation) is more useful because it
>explains the actual impact of the real world on borrowers and lenders rather
>than the (presumed) reasoning of the borrowers and lenders as they "arrive"

Mike the Unrepentent Leftist!!  poses the issue above.

well i think it is just a dodge that comes from crappy models. they have to
have some expected variable there so they measure expected inflation
arbitrarily. what has the current real interest rate got to do with current
actions anyway? well in RATEX it has, and then they should just use the
current nominal interest rate minus the current inflation rate as the
behavioural variable.

if you thought a projected real interest rate is influential,
the correct modelling should  treat the nominal r and the inflation rate
terms consistently w.r.t their temporal relations. so i agree mike.

kind regards
bill
the unrepentant marxist!!
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