Expected inflation and expected future real interest rate

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Nominal interest rates are quoted at a variety of maturities, corresponding to different lengths of loans. For example, in late 2004 the U.S. government could take out ten year loans at an annual interest rate of a bit over 4 percent, whereas the annual rate it paid on loans of only three months' duration was a bit under 2 percent. (An annualized interest rate of 2 percent on a three-month loan means that if you borrow a dollar, you repay $1.005 = $1 + (3/12) H $0.02 at the end of three months.) Typically, though not always, long-term interest rates are above short-term rates, as in the preceding examples from 2004. In terms of the Fisher effect, what would that pattern say about expected inflation and/or the expected future real interest rate?

Reference no: EM13833226

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