Expected inflation drives interest rates in opposite directions, study finds.
The study found that short-term real interest rates are more volatile than expected inflation. Nominal interest rates and expected inflation are negatively correlated for short maturities but positively correlated for long maturities. Inflation risk premia are small and constant, and they are negatively correlated with expected inflation. The results support the Mundell-Tobin Effect, where higher inflation leads to higher nominal interest rates but lower real interest rates.