Question 10.27

10.27 T-bills and inflation.

Exercises 10.6 through 10.8 interpret the part of the Excel output in Figure 10.10 (page 499) that concerns the slope, the rate at which T-bill returns increase as the rate of inflation increases. Use this output to answer questions about the intercept.

  1. The intercept in the regression model is meaningful in this example. Explain what represents. Why should we expect to be greater than 0?
  2. What values does Excel give for the estimated intercept and its standard error ?
  3. Is there good evidence that is greater than 0?
  4. Write the formula for a 95% confidence interval for . Verify that hand calculation (using the Excel values for and ) agrees approximately with the output in Figure 10.10.

10.27

(a) is the return on T-bills when there is no inflation. Without inflation, we would expect a positive return on any invested money. (b) . (c) . There is significant evidence that the intercept is greater than 0. (d) Using , which gives the same answer as Excel (with rounding error).