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( % +w . 4, / t +w . 4, @  +w,  4 2 . ^ % +w . 4, 5 ( 5 ^ zkhuh ( @ +(c > 3,/ ^ @ +^ > ^2 , dqg ++w,> +w,, iroorzv d mrlqw 90vwdwh uhjlph vkliw prgho +wzr vwdwhv iru +w, dqg wkuhh iru +w,,1 Wkh wudqvlwlrq suredelolw|  ehwzhhq vwdwh +  >  , dqg vwdwh +  >  , frpsxwhg dv  @ n5  b iru l 9@ m dqg  @ 4   '  iru l @ m> b W S '  W zkhuh  @ h{s+ f .    .  2  .   .  e  , = Wkh Uhdo dqg Qrplqdo Sulflqj Nhuqhov W duh jlyhq e| p|n @ p| h &|n n j6 0|n > q|n @ p| h |n n j6 0|n > 3 3 zkhuh n| @ f .  | . 2 | / k| @ U . n| . | dqg f @ f  6  ( 1 Hvwlpdwhv duh rewdlqhg W  e| Pd{lpxp Olnholkrrg e| ghqlqj l1l1g1 sulflqj huuruv lq dgglwlrq wr wkh olnholkrrg ixqfwlrq 65 jhqhudwhg e| wkh prgho iru g| dqg t| 1 Sulflqj huuruv duh rewdlqhg e| wkh prgho0jhqhudwhg sulfh0hduqlqjv udwlrv dqg |lhogv iurp wkh irupxodv # ? $ V +w, [ [ @ F  +w, > G +w,  ' dqg/ | +w>  , @  orj Y + ,  +w, @> ' +, zkhuh F dqg Y  duh dqdo|wlfdo ixqfwlrqv ri wkh sdudphwhuv/ jlyhq lq wkh wh{w1 Pruh ghwdlov derxw wkh hvwlpdwlrq phwkrg duh frqwdlqhg lq Dsshqgl{ E1 W vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvfhgdvwlflw| dqg dxwrfruuhodwlrq1 66 Wdeoh 7= Vwrfn Uhwxuq Yrodwlolw| Yro1+04, LqiXqf1 HduqXqf1 LqiYro1 HduqYro1 ExvLg{1 LqiOhy1 U2 Olylqjvwrq 3176:< 41<;4< 31578< +8=<8<6, WWW +4=<794, W Suri Iruhf 3168;: 6167:: 31493; +6=;3<8, WWW +4=<569, W UPVH 3185:3 5176<; 3165:4 +:=36<7, WWW +5=;:43, WWW Olylqjvwrq 3175;3 3=38;7 3148<7 +7=:47<, WWW +3=78<:, Suri Iruhf 316999 313;37 314694 +6=;68;, WWW +4=46;;, UPVH 318789 4175:3 316536 +:=978<, WWW +5=5555, WW Olylqjvwrq 317936 417835 4179;7 4=<57: 315776 +:=4:75, WWW +4=4:46, +3=6937, +4=8:;:, Suri Iruhf 3165:< 51:<<; 3=855: 5=3:46 314:58 +7=648:, WWW +4=5639, +3=4;78, +5=3<7<, WW UPVH 31856< 513846 317;44 3=63<9 316597 +:=8744, WWW +4=;93;, W +3=8744, +3=;934, Olylqjvwrq 3177;6 415779 4194<8 4=935; 3=35:5 4=9479 315;43 +:=9543, WWW +3=<:;3, +3=6<:5, +4=6466, +6=4;83, WWW +4=6544, Suri Iruhf 315<65 519477 3189<6 5=3575 3=33;: 4=4:75 314;33 +8=3<9<, WWW +4=3489, +3=53;9, +5=3:5<, +4=765:, WW +5=4338, WW UPVH 31834: 41:4:8 313563 3=5;35 3=3398 3=34<: 31666; +w0vwdw, +:=983<, WWW +4=9<3;, W +3=356:, +3=:87:, +6=7;33, WW +3=3:46, Wklv wdeoh uhsruwv wkh wlph vhulhv uhjuhvvlrqv Yro +w, @ f .   Yro +w  4, . 2 Xqf +w, . G [ +w, . % +w, > +, zkhuh Yro w lv wkh vwrfn uhwxuq yrodwlolw| lq prqwk/ txduwhu ru vhphvwhu w/ Xqf w lv hlwkhu +, +, +, Lq dwlrq Xqfhuwdlqw| +LqiXqf w , ru hduqlqjv jurzwk xqfhuwdlqw| +HduqXqf w , gxulqj prqwk/ txduwhu ru vhphvwhu w/ dv frpsxwhg e| Vxuyh|0gdwd ru wwhg iurp wkh Uhjlph0Vzlwfklqj Prgho1 +, +, +, [ w frqwdlqv d yhfwru ri frqwurov= LqiYro w dqg HduqYro w duh wkh fxuuhqw yrodwlolw| ri lq d0 wlrq dqg hduqlqjv jurzwk/ uhvshfwlyho|/ frpsxwhg e| wwlqj d JDUFK+4/4, prgho wr lq dwlrq +, ru hduqlqjv jurzwk/ ExvLg{ w lv dq exvlqhvv f|foh gxpp| yduldeoh wdnlqj ydoxh @ 4 gxu0 +, lqj h{sdqvlrqv/ dv ghqhg e| wkh QEHU/ dqg LqiOhy w lv wkh ohyho ri lq dwlrq1 W vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvnhgdvwlflw| dqg dxwrfruuhodwlrq1 67 Wdeoh 8= Vkruw Whup Erqg Uhwxuq Yrodwlolw| Yro+04, LqiXqf LqiYro ExvLg{ LqiOhy U2 Olylqjvwrq 3=686; 3=8:<: 3175:3 +6=366;, WWW +6=8<::,WWW Suri Iruhf 3169;9 319::3 315:94 +5=56:8, WW +6=8:54,WWW UPVH 316;76 3186<; 315977 +6=5:3;, WWW +6=9873,WWW Olylqjvwrq 31668: 3179<: 319:89 31775< +5=:3<:, WWW +5=:<75,WWW +4=;938, W Suri Iruhf 315<88 317885 319434 316453 +4=:4:5, W +4=<4<4, W +5=6367, WW UPVH 316836 316;35 3164<4 315;56 +6=4854, WWW +5=7:8:,WW +5=8785, WW Olylqjvwrq 315<69 318375 31:663 3=3353 3=4;33 317845 +5=969;, WWW +5=7975,WW +4=;863, W +4=93;;, +4=47;9, Suri Iruhf 3158<4 3169;< 319475 3=3345 3=3689 316457 +4=868:, +4=:3;3, W +5=4957, WW +4=37;<, +3=6;;3, UPVH 3164:7 316635 315474 3=333< 3=375; 315<7: +5=:8<8, WWW +5=9::6,WWW +4=:96<, W +4=95:3, +3=<<37, Wklv wdeoh uhsruwv wkh wlph vhulhv uhjuhvvlrqv Yro +w, @ f . Yro +w  4, . 2 LqiXqf +w, . G [ +w, . % +w, > +, zkhuh Yro w lv wkh 40|hdu erqg uhwxuq yrodwlolw| lq prqwk/ txduwhu ru vhphvwhu w/ LqiXqf w , +, lv lq dwlrq xqfhuwdlqw| gxulqj prqwk/ txduwhu ru vhphvwhu w/ dv frpsxwhg e| Vxuyh|0gdwd ru +, wwhg iurp wkh Uhjlph0Vzlwfklqj Prgho1 [ w frqwdlqv d yhfwru ri frqwurov= LqiYro w lv wkh +, fxuuhqw yrodwlolw| ri lq dwlrq frpsxwhg e| wwlqj d JDUFK+4/4, prgho wr lq dwlrq/ ExvLg{ w +, lv dq exvlqhvv f|foh gxpp| yduldeoh wdnlqj ydoxh @ 4 gxulqj h{sdqvlrqv/ dv ghqhg e| wkh +, QEHU/ dqg LqiOhy w lv wkh ohyho ri lq dwlrq1 W vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvnhgdvwlflw| dqg dxwrfruuhodwlrq1 68 Wdeoh 9= Orqj Whup Erqg Uhwxuq Yrodwlolw| Yro+04, LqiXqf LqiYro ExvLg{ LqiOhy U2 Olylqjvwrq 316<35 41;;:6 316483 +5=5775, WW +4=9496, Suri Iruhf 3194<< 418458 31739< +:=;;<3, WWW +4=69:4, UPVH 3177:< 41<<:3 31588: +5=;653, WWW +5=3669,WW Olylqjvwrq 316<6; 41869: 41<594 316469 +5=4;43, WW +4=5<;8, +3=8<87, Suri Iruhf 318;73 31:43; 41;599 3174<7 +:=488;, WWW +3=84<;, +4=49<6, UPVH 317775 41:78< 317768 315886 +5=;986, WWW +4=9749, +3=7398, Olylqjvwrq 31695< 41;988 517745 3=3458 4=8957 316788 +5=3343, WW +4=9454, +3=9<34, +4=;:98, +4=6564, W Suri Iruhf 318987 413:<3 519463 313347 3=7<;9 31749; +9=5636, WWW +3=;:3:, +4=977;, +3=5<88, +4=36;3, W UPVH 317697 419335 315:<3 3=3358 3=3567 315887 +w0vwdw, +5=:838, WWW +4=8:85, +3=5;33, +4=39<;, +3=3;54, Wklv wdeoh uhsruwv wkh wlph vhulhv uhjuhvvlrqv Yro +w, @ f . Yro +w  4, . 2 LqiXqf +w, . G [ +w, . % +w, > +, zkhuh Yro w lv wkh 430|hdu erqg uhwxuq yrodwlolw| lq prqwk/ txduwhu ru vhphvwhu w/ LqiXqf w , +, lv lq dwlrq xqfhuwdlqw| gxulqj prqwk/ txduwhu ru vhphvwhu w/ dv frpsxwhg e| Vxuyh|0gdwd ru +, wwhg iurp wkh Uhjlph0Vzlwfklqj Prgho1 [ w frqwdlqv d yhfwru ri frqwurov= LqiYro w lv wkh +, fxuuhqw yrodwlolw| ri lq dwlrq frpsxwhg e| wwlqj d JDUFK+4/4, prgho wr lq dwlrq/ ExvLg{ w +, lv dq exvlqhvv f|foh gxpp| yduldeoh wdnlqj ydoxh @ 4 gxulqj h{sdqvlrqv/ dv ghqhg e| wkh +, QEHU/ dqg LqiOhy w lv wkh ohyho ri lq dwlrq1 W0 vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvnhgdvwlflw| dqg dxwrfruuhodwlrq1 69 Wdeoh := Fryduldqfh Vwrfn dqg Vkruw Whup Erqg Fry+04, LqiXqf HduqXqf LqiYro HduqYro ExvLg{ LqiOhy U2 Olylqjvwrq 313;78 31359< 3163;7 +3=8964, +7=;;8:, WWW Suri Iruhf 313973 3135:8 314795 +3=<336, +6=4458, WWW UPVH 31464; 313448 313:88 +4=<4:9, W +6=396;, WWW Olylqjvwrq 315638 313353 314746 +4=5;:3, +5=58:8, WW Suri Iruhf 313;7< 313347 313885 +3=<987, +5=8<:<, WWW UPVH 314889 31339< 31388; +5=6576, WW +5=5689,WW Olylqjvwrq 313599 313547 3137:9 313477 316:<3 +3=4;;:, +7=83:5, WWW +5=:95;, WWW +5=9:::, WWW Suri Iruhf 313454 313567 313478 313374 314874 +3=4699, +4=<<<4, WW +4=5784, +4=6;55, UPVH 314337 3133;3 3133;6 31335: 313<;7 +4=64<7, +5=7633, WW +5=896;, WW +5=:677, WWW Olylqjvwrq 31337: 31355: 313848 313494 3=3334 3=3433 31745; +3=3634, +6=7:;3, WWW +6=6943, WWW +6=3657, WWW +4=9;68, +3=<996, W Suri Iruhf 313458 313567 313486 313374 3=3333 3=333; 3146<4 +w0vwdw, +3=4746, +4=<:<7, WW +4=744;, +4=6<3;, +3=45;7, +3=5597, UPVH 313;68 3133:3 313388 313359 3=3333 31334; 314399 +w0vwdw, +4=3<5<, +5=6953, WW +4=<46:, W +6=3834, WWW +3=<5:;, +4=69:3, Wklv wdeoh uhsruwv wkh wlph vhulhv uhjuhvvlrqv Fry +w, @  f .   Fry +w  4, .  2 Xqf +w, . G [ +w, . % +w, > +, zkhuh Fry w lv wkh fryduldqfh ehwzhhq vwrfn uhwxuqv dqg wkh 40|hdu erqg uhwxuqv lq prqwk/ +, +, txduwhu ru vhphvwhu w/ Xqf w lv hlwkhu Lq dwlrq Xqfhuwdlqw| +LqiXqf w , ru hduqlqjv jurzwk +, xqfhuwdlqw| +HduqXqf w , gxulqj prqwk/ txduwhu ru vhphvwhu w/ dv frpsxwhg e| Vxuyh|0gdwd +, ru wwhg iurp wkh Uhjlph0Vzlwfklqj Prgho1 [ w frqwdlqv d yhfwru ri frqwurov= LqiYro w dqg +, +, HduqYro w duh wkh fxuuhqw yrodwlolw| ri lq dwlrq dqg hduqlqjv jurzwk/ uhvshfwlyho|/ frpsxwhg +, e| wwlqj d JDUFK+4/4, prgho wr lq dwlrq ru hduqlqjv jurzwk/ ExvLg{ w lv dq exvlqhvv f|foh gxpp| yduldeoh wdnlqj ydoxh @ 4 gxulqj h{sdqvlrqv/ dv ghqhg e| wkh QEHU/ dqg LqiOhy w lv +, wkh ohyho ri lq dwlrq1 W0vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvfhgdvwlflw| dqg dxwrfruuhodwlrq1 6: Wdeoh ;= Fryduldqfh Vwrfn dqg Orqj Whup Erqg Fry+04, LqiXqf HduqXqf LqiYro HduqYro ExvLg{ LqiOhy U2 Olylqjvwrq 316978 313968 314<43 +6=;678,WWW +4=8659, Suri Iruhf 3158<3 313:5< 313;83 +6=4<::,WWW +4=659;, UPVH 315:;4 313885 314474 +5=<6:3,WWW +5=4658, WW Olylqjvwrq 316457 3133:8 314646 +5=<546,WWW +3=<758, Suri Iruhf 315575 3133:; 313<94 +5=8455,WW +4=8838, UPVH 315<;5 313599 314339 +6=466<,WWW +4=84;9, Olylqjvwrq 316775 313958 313767 31377; 314:85 +6=3<<5,WWW +4=4<66, +3=6<8:, +3=<579, Suri Iruhf 315966 313<:< 3=37<: 313396 313::7 +6=6766,WWW +4=9;<6, W +3=<836, +3=593<, UPVH 315964 31397: 3=3368 313494 3144;< +5=:9<8,WWW +5=4937, WW +3=4<83, +4=<344, W Olylqjvwrq 315<99 313:86 313:5: 3139:4 3=3345 3=43;4 315;6; +5=:8;4,WWW +4=479<, +3=:558, +4=9468, +5=4635, +4=6<43, WW Suri Iruhf 315749 313;<6 3=3585 3=3434 3=3335 3=35:< 313;:3 +6=8799,WWW +4=<548, WW +3=7;8<, +3=7598, +3=;45;, +4=5693, UPVH 315743 313893 3=34:8 3=34:6 3=3335 3=334: 314643 +w0vwdw, +5=8:74,WW +5=3;;:, WW +3=<;4<, +5=5:3<, +5=3354, +3=5444, WW WW Wklv wdeoh uhsruwv wkh wlph vhulhv uhjuhvvlrqv Fry +w, @ f .   Fry +w  4, . 2 Xqf +w, . G [ +w, . % +w, > +, zkhuh Fry w lv wkh fryduldqfh ehwzhhq vwrfn uhwxuqv dqg wkh 430|hdu erqg uhwxuqv lq prqwk/ +, +, txduwhu ru vhphvwhu w/ Xqf w lv hlwkhu Lq dwlrq Xqfhuwdlqw| +LqiXqf w , ru hduqlqjv jurzwk +, xqfhuwdlqw| +HduqXqf w , gxulqj prqwk/ txduwhu ru vhphvwhu w/ dv frpsxwhg e| Vxuyh|0gdwd +, ru wwhg iurp wkh Uhjlph0Vzlwfklqj Prgho1 [ w frqwdlqv d yhfwru ri frqwurov= LqiYro w dqg +, +, HduqYro w duh wkh fxuuhqw yrodwlolw| ri lq dwlrq dqg hduqlqjv jurzwk/ uhvshfwlyho|/ frpsxwhg +, e| wwlqj d JDUFK+4/4, prgho wr lq dwlrq ru hduqlqjv jurzwk/ ExvLg{ w lv dq exvlqhvv f|foh gxpp| yduldeoh wdnlqj ydoxh @ 4 gxulqj h{sdqvlrqv/ dv ghqhg e| wkh QEHU/ dqg LqiOhy w lv +, wkh ohyho ri lq dwlrq1 W0vwdwlvwlfv lq sduhqwkhvlv1 Wkh v|perov ---/ -- dqg - ghqrwh vljqlfdqfh dw 4(/ 8( dqg 43( ohyhov uhvshfwlyho|1 Doo w0vwdwlvwlfv duh dgmxvwhg iru khwhurvfhgdvwlflw| dqg dxwrfruuhodwlrq1 6; Iljxuh 4= Xqfhuwdlqw| Phdvxuhv iurp Olylqjvwrq Vxuyh| Gdwd Uncertainty on Future Inflation 0.03 0.025 0.02 0.015 0.01 0.005 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Uncertainty on Future Corporate Profits 0.15 0.1 0.05 0 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh uhsruwv sur{lhv iru xqfhuwdlqw| rq ixwxuh lq dwlrq ru ixwxuh frusrudwh surwv rewdlqhg e| xvlqj wkh Olylqjvwrq Vxuyh| gdwd1 Vrolg olqh uhsuhvhqwv xqfhu0 wdlqw| rq 45 prqwk krul}rq dqg gdvk0grwwhg olqh uhsuhvhqwv xqfhuwdlqw| rq 9 prqwk krul}rq1 6< Iljxuh 5= Xqfhuwdlqw| Phdvxuhv iurp wkh Vxuyh| ri Surihvvlrqdo Iruhfdvwhuv Uncertainty on Current and Future Inflation 0.02 0.015 0.01 0.005 0 1970 1975 1980 1985 1990 1995 2000 Uncertainty on Current and Future Corporate Profits 0.15 0.1 0.05 0 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh uhsruwv sur{lhv iru xqfhuwdlqw| rq ixwxuh lq dwlrq ru ixwxuh frusrudwh surwv rewdlqhg e| xvlqj wkh Vxuyh| ri Surihvvlrqdo Iruhfdvwhuv gdwd1 Vrolg olqh uhsuhvhqwv xqfhuwdlqw| rq 45 prqwk krul}rq/ gdvk0grwwhg olqh uhsuhvhqwv xqfhuwdlqw| rq 9 prqwk krul}rq dqg grwwhg olqh uhsuhvhqwv xqfhuwdlqw| rq wkh fxuuhqw txduwhu1 73 Iljxuh 6= Ilwwhg Lq dwlrq dqg Lqwhuhvw Udwhv Fitted and Realized Inflation 0.02 0.01 0 -0.01 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fitted and Realized Short Term Interest Rate 0.015 0.01 0.005 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fitted and Realized Long Term Interest Rate 0.015 0.01 0.005 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh uhsruwv dfwxdo lq dwlrq/ vkruw0whup lqwhuhvw udwh dqg orqj whup |lhog dorqj zlwk wkhlu iruhfdvwhg ydoxhv rewdlqhg iurp wkh prgho1 Wkh hvwlpdwlrq phwkrg xvhv frqwhpsrudqhrxvo| ixqgdphqwdov +lq dwlrq dqg hduqlqjv jurzwk, dqg qdqfldo yduldeohv +orqj dqg vkruw whup |lhogv dqg sulfh0hduqlqj udwlr, wr frpsxwh erwk wkh srvwhulru suredelolwlhv dqg wkh sdudphwhuv ri wkh vwrfkdvwlf glvfrxqw idfwru1 Gdvk0 grwwhg olqh uhsuhvhqwv dfwxdo revhuydwlrqv dqg vrolg olqh wkh wwhg ydoxhv1 74 Iljxuh 7= Ilwwhg Hduqlqjv Jurzwk dqg Sulfh0Hduqlqjv Udwlr Fitted and Realized Earning Growth 0.15 0.1 0.05 0 -0.05 -0.1 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fitted and Realized Price-Earning Ratio 40 35 30 25 20 15 10 5 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh uhsruwv dfwxdo hduqlqjv jurzwk dqg sulfh0hduqlqjv udwlr dorqj zlwk wkhlu iruhfdvwhg ydoxhv rewdlqhg iurp wkh prgho1 Wkh hvwlpdwlrq phwkrg xvhv frqwhp0 srudqhrxvo| ixqgdphqwdov +lq dwlrq dqg hduqlqjv jurzwk, dqg qdqfldo yduldeohv +orqj dqg vkruw whup |lhogv dqg sulfh0hduqlqj udwlr, wr frpsxwh erwk wkh srvwhulru suredelolwlhv dqg wkh sdudphwhuv ri wkh vwrfkdvwlf glvfrxqw idfwru1 Gdvk0grwwhg olqh uhsuhvhqwv dfwxdo revhuydwlrqv dqg vrolg olqh wkh wwhg ydoxhv1 75 Iljxuh 8= Xqfhuwdlqw| Phdvxuhv= UV0UPVH -3 RS-RMSE of Inflation x 10 4 3 2 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 -3 RS-RMSE of Earnings Growth x 10 5 4 3 2 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh sorwv wkh wlph vhulhv ri wwhg xqfhuwdlqw| ohyho dv phdvxuhg e| wkh UV0UPVH ri d glvwulexwlrq wkdw duh rewdlqhg zkhq wkh uhjlph0vkliw prgho lv hvwl0 pdwhg xvlqj erwk ixqgdphqwdo yduldeohv +l1h1 lq dwlrq dqg hduqlqjv, dqg qdqfldo yduldeohv +l1h1 orqj dqg vkruw whup |lhogv dqg sulfh0hduqlqj udwlrv,1 76 Iljxuh 9= Hfrqrplvw Xqfhuwdlqw| dqg UV0UPVH Inflation Uncertainty 0.02 0.015 0.01 0.005 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Earnings Growth Uncertainty 0.2 0.15 0.1 0.05 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh sorwv wkh xqfhuwdlqw| phdvxuhv rewdlqhg iurp wkh wkh Olylqjvwrq Vxuyh| gdwd +vrolg olqh, dqg wkh prgho0edvhg Urrw PVH phdvxuh +gdvkhg0grwwhg olqh,1 Wkh wzr phdvxuhv kdyh ehhq uhvfdohg1 77 Iljxuh := Vwrfn Uhwxuq Yrodwlolw| dqg Xqfhuwdlqw| Phdvxuhv 0.25 0.2 0.15 0.1 0.05 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh sorwv wkh wlph vhulhv ri vwrfn uhwxuq yrodwlolw| +gdvkhg0grwwhg olqh, re0 wdlqhg iurp gdlo| uhwxuqv zlwk wkh wlph vhulhv ri prgho0edvhg lq dwlrq xqfhuwdlqw| +vrolg olqh,1 Wkh odwwhu kdv ehhq uhvfdohg1 78 Iljxuh ;= Yrodwlolw| ri Erqg Uhwxuqv dqg Xqfhuwdlqw| rq Ixwxuh Lq dwlrq Inflation Uncertainty and the Volatility of 1-year Bonds 0.015 0.01 Volatility 0.005 0 1965 1970 1975 1980 1985 1990 1995 2000 Inflation Uncertainty and the Volatility of 10-year Bonds 0.07 0.06 0.05 Volatility 0.04 0.03 0.02 0.01 0 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh sorwv wkh wlph vhulhv ri wkh yrodwlolw| ri 4 dqg 43 |hdu erqg uhwxuqv +gdvk0grwwhg olqhv, rewdlqhg iurp gdlo| uhwxuqv zlwk wkh wlph vhulhv ri prgho0edvhg xqfhuwdlqw| ri ixwxuh lq dwlrq +vrolg olqh,1 Wkh odwwhu kdv ehhq uhvfdohg1 79 Iljxuh <= Fryduldqfh Ehwzhhq Vwrfn dqg 40|hdu Erqg Uhwxuqv dqg 45 Prqwk Lq dwlrq Xqfhuwdlqw| -4 x 10 4 3 2 1 0 -1 -2 -3 -4 1965 1970 1975 1980 1985 1990 1995 2000 Wklv jxuh sorwv wkh wlph vhulhv ri wkh fryduldqfh ehwzhhq vwrfn uhwxuqv dqg 4 |hdu erqg uhwxuqv +gdvkhg0grwwhg olqh, rewdlqhg iurp gdlo| uhwxuqv dorqj zlwk wkh wlph vhulhv ri prgho0edvhg lq dwlrq xqfhuwdlqw| +vrolg olqh,1 Wkh odwwhu kdv ehhq uhvfdohg1 7: