INTEREST RATES AND INFLATION EXPECTATIONS: THE BRITISH EXPERIENCE^*

Government Policy and House Prices in the United Kingdom: An Econometric Analysis

“…284 BULLETIN anticipated inflation rate. Yet the British experience (for short-term interest rates) examined by Foster (1979) suggests the opposite, and, following Hendershott and Hu (forthcoming), we have demonstrated that even with an unindexed tax system, if the risk premium on equities rises with inflation, then the pre-tax real rate of interest can remain constant when inflation changes. Evaluating the empirical validity of our assumption is not only difficult for the reasons indicated by Foster, but measuring the impact of the expected inflation rate on the pre-tax real rate of return is inherently difficult in a world of uncertainty.…”

“…Lucas (1975)) makes it clear that structural instability of the distributed lag relationship is very likely. An 'observed' inflation expectations series based on survey data is only available for the UK before 1974 and its time horizon is only six months (see Foster (1979)), which is inappropriate for discussing investment in an illiquid asset like housing.…”

Pitfalls in the Application of the Cochrane‐orcutt Technique

“…(1979), it is now common to see empirical results reported where the 'Cochrane-Orcutt' technique has been applied (see e.g. Foster (1979) and Oulton (1981)).…”