Short-term interest rate and inflation in the long run: a study of the US and UK from 1803 to 1990

Abstract

This paper provides empirical evidence concerning the long-run properties of expected real interest rate and nominal interest rate as a predictor of inflation using US and UK data from 1803 to 1990. It is found that we can reject the null hypothesis of constancy of ex ante real interest rate for the US, but we cannot reject it for the case of the UK. Evidence also suggests that over the long time period, nominal interest rate does not seem to be a good predictor of inflation, especially for the case of the US.