The Impact of Inflation Uncertainty on Interest Rates in the UK

This paper assesses the effect of expected inflation and inflation risk on interest rates within the Fisher hypothesis framework. Autoregressive conditional heteroscedastic models are used to estimate the conditional variability of inflation as a proxy for risk. With the U.K. quarterly data from 1958:4 to 1994:4, the author finds that both the expected inflation and the conditional variability of inflation positively affect the U.K. three-month Treasury-bill rate