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Ronald E. McNair Post Baccalaureate Achievement ProgramWelcome to the Ronald E. McNair Post Baccalaureate Achievement Program
526 5th Street
Cheney, WA 99004
Abstract: Christy's Hair Salon
Mentor: Dr. Leo Simpson, Business
Abstract: (1+Ɩ)=(1+r)(1+π) Disputing Fisher's Theory
Mentor: Dr. David Eagle, Economics
One of the most widely known theories of Irving Fisher is the Theory of Interest. This Theory states that the normal interest rate is equal to real interest rate plus inflation rate ( i = r + π ). According to Fisher, movements in nominal bond yields originate from two sources: changes in real interest rates and changes in expected inflation. Fisher's theory provides a guide for investigating the extent to which long-term bond yields serve as reliable indicators of long-term inflationary expectations. In particular, if the long-term interest rate is uncorrelated with inflation, then a 1% increase or decrease in long-term bond yields signals a 1% increase or decrease in expected inflation.
In this study, we assess the practical usefulness of long-term bond yields as indicators of long-term inflationary expectations. We investigate whether or not the real interest rate is uncorrelated with expected inflation, by using observed real yields on inflation index bonds in the UK.