A note on the variability of real interest rates, business cycles, and the livingston data

In the context of a structural model of interest rate determination, we show how the separate impacts of business cycles on the nominal rate through their effects on the ex ante real rate and inflation forecast errors can be consistently estimated. Ours is a generalization of Tanzi's (1980) model and demonstrates that over 1952-1980, the Livingston data has significantly underestimated the underlying price expectations by nearly 25%.