Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits

Investigators have been moving from merely testing the hypothesis of constancy of the real rate of interest to investigating an explanation for the real rate movements indicated by a large body of statistical evidence. A Fisher-type interest rate equation is here derived from a structural model to examine the behavior of the 3-month Treasury bill rate over a period from 1959 through 1981. The results suggest that, once effects upon the expected real rate of money surprises, anticipated inflation, and inflation uncertainty are controlled for along with the impact of taxes, market interest rates reflect an efficient inflationary premium.