Question
1. Go to the Federal Reserve Economic Data (FRED) database at https://research.stlouisfed.org/fred2/ 2. Find the three-month treasury bill: secondary market rate, and the consumer price
1. Go to the "Federal Reserve Economic Data" (FRED) database at https://research.stlouisfed.org/fred2/
2. Find the three-month treasury bill: secondary market rate, and the consumer price index for all urban consumers: all items.
3. Download both at a monthly frequency from 1947-present
4. Calculate the lagged yearly net inflation rate from the CPI data in percent terms. (For period t, divide period t's CPI by period t 12's CPI. This is gross inflation. Subtract the gross inflation by 1 and multiply by 100 to get the net inflation rate in percent: t12t = 100 CP It CP It12 1 )
Plot and compare the net inflation rate and the three-month treasury bill together from 1948- present: what do you notice? In economics, you frequently see the "Fisher Equation", which is i r + , or "the nominal interest rate is (to a first-order approximation) equal to the real interest rate plus the inflation rate." If the three-month treasury bill is i, and the inflation rate you calculated is , does your graph give you any information about whether r or can explain what's going on with i? That is, when r or moves, i moves by definition. We see a lot of variation in i on your graph. Qualitatively, how much can be attributed to vs. r?
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