Using data from the St. Louis Federal Reserve
(FRED) (http://research.stlouisfed.org/fred2/),
analyze the long-term real interest rate.
a. For 2003 to the present, download monthly
data for the 10-year constant maturity U.S.
Treasury security (GS10) as a measure of
the nominal interest rate and the 10-year
U.S. Treasury inflation protected security
(FII10) as a measure of the real interest
rate. The Fisher relationship tells us that
the expected inflation rate is the nominal
interest rate minus the real interest rate.
Calculate the expected inflation rate over
the next ten years using this data.
b. For 2003 to the present, download monthly
data on Aaa corporate bonds (AAA). The
Fisher relationship also tells us that the real
interest rate equals the nominal interest rate
minus the expected inflation rate. Calculate
the real interest rate for Aaa corporate
bonds. Chart the series on a graph.
c. What happened to the real interest rate
from the beginning of the recession in
December 2007 to August 2008? Does this
suggest that shifts in the IS curve or MP
curve were responsible for the start of the
recession? Explain.
d. What happens to the real interest rate from
September 2008 to November 2008? Does
this suggest that shifts in the IS curve or
MP curve were responsible for the deepening
of the recession during the fall of 2008?
Explain.