Pattern-Based Inflation Expectations and the U.S. Real Rate of Interest

Abstract

This study applies the concept of pattern-based inflation expectations to the measurement of U.S. real rates of interest. The measure of expected inflation builds on a laboratory-based survey of expectations. We show how our measures of real interest rates differ from measures based on the Michigan survey of inflation expectations. In econometric estimates analyzing the determinants of real interest rates we find no evidence of an effect of the heterogeneity of inflation expectations. However, higher uncertainty regarding expected inflation tends to increase the real rate of interest. We show that this risk premium may account for findings suggesting the non-stationarity of the real rate of interest.