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.
|Number of pages||16|
|Journal||Journal of Financial Research|
|Publication status||Published - Sep 2002|