TY  - JOUR
AU  - Barr,David G.
AU  - Campbell,John Y.
TI  - Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5821
PY  - 1996
Y2  - November 1996
UR  - http://www.nber.org/papers/w5821
L1  - http://www.nber.org/papers/w5821.pdf
N1  - Author contact info:
David G. Barr
Threadneedle St  London EC2R 8AH
E-Mail: david.barr@durham.ac.uk

John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu
AB  - This paper estimates expected future real interest rates and inflation rates from observed prices of UK government nominal and index-linked bonds.  The estimation method takes account of imperfections in the indexation of UK index-linked bonds.  It assumes that expected log returns on all bonds are equal, and that expected real interest rates and inflation follow simple time-series processes whose parameters can be estimated from the cross-section of bond prices.  The extracted inflation expectations forecast actual future inflation more accurately than nominal yields do.  The estimated real interest rate is highly variable at short horizons, but comparatively stable at long horizons.  Changes in real rates and expected inflation are strongly negatively correlated at short horizons, but not at long horizons.
ER  -