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Economic Quarterly

Winter 1996

Long-Term Interest Rates and Inflation: A Fisherian Approach

Peter N. Ireland

A contemporary extension of Irving Fisher's theory of interest identifies three determinants of long-term nominal bond yields: long-term real interest rates, risk premia, and long-term inflationary expectations. Empirically, however, the long-term real rate is quite stable and the risk premium is quite small. Consequently, movements in long-term bond yields reliably signal changes in expected inflation.

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