A Comparison of Alternative Real Rate Estimates.

The authors compare the estimated after-tax ex ante real interest rates and the inflation forecasts generated by two alternative approaches: (1) the rational expectations model in which the real rate is assumed to have an autoregressive structure, and (2) by utilizing the Livingston survey data on expected inflation. The real rates estimated by the two approaches are very different . Whereas the Livingston series is not found to be a well-calibrated measure of inflation, the expected inflation series generated by the rationally expected real rate model supports the unbiasedness hypothesis and is significantly more accurate in terms of root mean squared prediction error. Copyright 1988 by Blackwell Publishing Ltd