Go to the web site of the Federal Reserve Bank of St. Louis Federal Reserve (FRED) (fred.stlouisfed.org) and download data from January 2003 to the most recent available month on the 10-year constant maturity U.S. Treasury notes (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.
a. 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 these data.
b. For January 2003 to the most recent available month, download 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 using your results from part (a). Plot the resulting data 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 movement in the real interest rate suggest that shifts in the IS curve or MP curve were most likely to have been responsible for the start of the recession? Briefly explain.
d. What happens to the real interest rate during the period from September 2008 to November 2008? Does this movement in the real interest rate suggest that shifts in the IS curve or MP curve were responsible for the worsening of the recession during the fall of 2008? Briefly explain.