Keywords: Inflation-indexed securities, forward rates, risk premium, monetary policy
Abstract: What does the level of the real interest rates tell us about where
the economy, or one's portfolio, is headed? The answer to
this question depends on one's estimate of the ``equilibrium'' value
of real interest rates, a measure that is unfortunately not directly
observed in the market place. In this paper, I provide a brief
overview of some of the existing approaches to defining and
measuring equilibrium real rates and introduce a novel method
based on yields on the U.S. Treasury's inflation-indexed securities
(TIIS). I discuss a simple framework for analyzing TIIS yields and
illustrate how to use them to gauge the stance of monetary policy
and overall economic prospects.
Full paper (186 KB PDF)
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Last update: March 20, 2002