lecture13 - Economics 310 Money and Banking Lecture13...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 310 Money and Banking Lecture 13 University of Michigan  Fall 2010
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Lecture 1 Reading Bond Market and Interest Rates Chapters 4 and 5 Assignment available on line later today
Background image of page 2
3 Lecture 1 Adjusting for expected inflation Let e be the expected inflation rate i be the nominal interest rate r be the real interest rate The real interest rate is The nominal interest rate Discounted by the expected inflation rate (1+r) = (1+i)/(1+ e )
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Lecture 1 Why  expected  inflation? We care about the real interest rate as it motivates the choices of agents When making decisions, agents are forward looking Factor into their decisions expectations about future price changes
Background image of page 4
5 Lecture 1 The Fisher Equation Given: (1+r) = (1+i)/(1+ ∏ e ) Or: (1+r)(1+ ∏ e ) = (1+i) So that i = 1 + r + ∏ e + r. ∏ e -1 = r + ∏ e + r. ∏ e As r and ∏ e are typically small, we can ignore r. ∏ e So approximately i = r + ∏ e (Fisher Equation)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Lecture 1 Real Interest Rate As an indicator of economic activity, we would like to know the real interest rate We know the nominal interest rate We don’t get to observe the expected inflation rate Where do we get real interest rate data? Use observed (ex post) inflation measure as a proxy for the expected inflation rate Use surveys Make use of TIPS
Background image of page 6
7 Lecture 1 TIPS Treasury Inflation Protected Securities i.e. Indexed bonds Promises a series of payments in real terms Inflates the real payments using the CPI to deliver an appropriate nominal payment Coupon bonds, with coupon payments made every six months 5, 7, 10 and 20 year maturity
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/08/2010 for the course PYSCH 111 taught by Professor Malley during the Spring '08 term at University of Michigan.

Page1 / 22

lecture13 - Economics 310 Money and Banking Lecture13...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online