Abstract
EVER SINCE IVRING FISHER'S (1930) seminal contribution, considerable attention and controversies in macroeconomic and finance literature have centered around relationship between expected inflation and interest rates.' As is well known, Fisher [5] first advanced hypothesis that interest rates contain market forecasts of future inflation rates. This informational aspect of Fisher's theory of interest has been examined in recent contributions by Eugene Fama [3, 4], and constitutes focal issue of this paper. Fama tested a strict, rational-expectations and constant-expected-real-rate, version of Fisher's theory using U.S. data on one to six month inflation and Treasury bill rates for 1953-71 period. His findings not only indicate that interest rates are good predictors of inflation, and that they embody significant information beyond that contained in past inflation rates alone, but also that... the interest rate remains single best predictor of inflation rate. Fama [4].
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