Monetary rules and the nominal rate of interest under uncertainty

Abstract

The expected real rate of return on a nominal bond is shown to be equal to the real rate of interest plus a premium for systematic purchasing power risk. The particular monetary rule employed by the central monetary authority affects the entire joint distribution of inflation and aggregate real wealth. Thus, the monetary authority is able to influence the relationship between the real and nominal interest rate not only by affecting the expected rate of inflation but also by affecting the systematic purchasing power risk of fixed nominal claims.