Direct Evidence of the Darby Hypothesis for the United States

Cargill, Thomas F.

doi:10.1111/j.1465-7295.1977.tb00456.x

Cited by 24 publications

(12 citation statements)

References 5 publications

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“…Second, is the adjustment of the nominal rate to expected inflation complete in the presence of a progressive income tax structure? Empirical work by Cargill [3], J. Carr, J. Pesando, and L. Smith [11], and Carlson [10] suggest that the adjustment is not complete for the 1960s, though Cargill and Carlson found a larger adjustment of the nominal rate of expected inflation than Carr, et al We now turn to a consideration of these two issues.…”

Section: An Expanded Relationship Between Nominal Yields and Expementioning

confidence: 99%

The Term Structure of Inflationary Expectations and Market Efficiency

Cargill¹,

Meyer²

1980

The Journal of Finance

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FISHER'S [15] ORIGINAL FORMULATION OF an equilibrium relationship in which a nominal interest rate is equal to a real rate of interest plus the expected rate of inflation has stimulated considerable interest and research. Although many empirical studies have utilized a single equation distributed lag specification1 of past price changes (which might be induced from a rational expectations argument) as a proxy for "expectations," T. F. Cargill and R. A. Meyer [5] have emphasized the necessity of a simultaneous equation structure if such distributed lags were to be employed. An alternative approach using Livingston's direct observations on expectations and allowing for the possibility of incomplete adjustment to expectations was employed by Cargill [2], W. Gibson [16] and D. Pyle [22]. These evolving improvements in conception of the empirical problem, data and econometric approach have led to a particularly interesting paper by K. Lahiri [18] in which S. Turnovsky's [25] expectations formation equations are coupled to the original Fisherian equation and then appropriate simultaneous equation techniques are applied to the resulting econometric relationships. From a slightly different perspective, E. Fama [13] has emphasized the implication for market efficiency embedded in the interest rate and expected inflation relationship. All analyses to date rest on the assumption that the real rate of interest is constant over time. Thus, as Fama noted, empirical implications for market efficiency tests really constitute a test of the joint hypothesis of efficiency and a constant rate.2 Despite the advances in conception of the empirical problem, data improvements, and improvements in econometric technique, the question of variation in the real rate of interest and the possibility of incomplete adjustment to changes in the real rate as well as to expected inflation leaves the extent and stability of the Fisherian relationship far from a settled matter. In addition, a much richer class of hypotheses emerges when Fama's emphasis on the market equilibrium aspects is carried further. No prior work has utilized any type of data to estimate the terni structure of expectations which is the key to Fisher's hypothesis when applied across maturities. In addition, the contributions of W. Sharpe [24] and J. Lintner [20] in providing an equilibrium capital asset pricing theory can be * The authors are professors,

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Section: An Expanded Relationship Between Nominal Yields and Expementioning

confidence: 99%

The Term Structure of Inflationary Expectations and Market Efficiency

Cargill¹,

Meyer²

1980

The Journal of Finance

Self Cite

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“…See Masera (1972) for a useful survey of the term structure debate.2 For exampleCagan (1969a). (1971),Kessel (1965) andconard (1966) all perform detailed INTEREST RATES AND INFLATION EXPECTATIONS…”

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confidence: 99%