| The Fisher equation relates real interest rates to nominal interest rates. Let rt, be the real interest rate, i, the nominal interest rate, and ?et the expected rate of inflation. The Fisher equation states that rt, = i – ?et. Because expected inflation is not observable today, we will use the realized inflation. Download the U.S. CPI and construct the inflation series. Is inflation stationary? Download the U.S. 3-month Treasury bill rates. Is the Treasury Bill rate stationary? Construct the difference rt,= i – ?et. Is it stationary? Is it a cointgrating relation? |
