Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons

We define the Fisherian Golden Rule measure of bond market inflation expectations as the difference between bond rates and trend real GDP growth rates. The concept is based on the Fisherian theory that an increase in longer-term inflation expectations would be reflected in longer-term interest rates and the Golden Rule theory that in longer-term equilibrium the real rates of interest would equal the growth rate of real output. We compare the bond market inflation experiences of 13 advanced countries for the 1881-1913 gold standard era with the experience of the recent 1962 1995 period. The difference between average longer-term bond rates and average real GDP growth rates reflected the widespread expectation of low inflation during 1881-1913 in all of the industrial countries. Although real GDP growth was somewhat higher on average during 1962-65 than 1881-1913, bond rate averages were considerably higher, roughly comparable with the higher observed inflation rates. Long-term bond rates fell across the spectrum of the industrial countries in the 1980s and 1990s and bond market expectations for low inflation were substantially, but not fully regained for the industrial countries as a group.