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Understanding the behavior of real interest rates is a central issue in monetary/macro economics. Recently researchers have begun to use futures market data to examine real interest rate behavior. Futures market data can be used to directly construct own-commodity real interest rates ? i.e., the ex-ante real return on a bond in terms of specific commodities -- and then the own-commodity real rates can be used to make inferences about the real interest rate for the aggregate economy, This paper examines whether futures market data can be used to understand the behavior of real interest rates. The conclusion is a negative one: Futures market data do not appear to be particularly informative about real interest rates. In coming to this conclusion, the paper examines the data in several ways. First. the ex-ante relative price movement embedded in the own-commodity real rates (the noise) is calculated to be on the order of over one hundred times more variable than the aggregate real interest rate (the signal), Own-commodity real rates are thus unlikely to contain much information about the aggregate real interest rate. Second. several widely accepted facts about the behavior of aggregate real interest rates in the 1960s are not at all evident in the own-commodity real rate data. Thus, analysis of own- commodity real rates provides a misleading impression of aggregate real rate movements for a period which displays the most striking movements of real interest rates in the postwar period. Finally, an econometric analysis of own-commodity real rate behavior fails to find evidence of a shift in the behavior of real interest rates when the monetary policy regime changes in October 1579, a finding that is at odds with previous strong findings in the literature.

How real interest rates behave over time is critical to our understanding of many macroeconomic issues, and much recent research has pursued this question. Very little of the research, however, has focused on real interest rates outside the United States. This paper is an empirical exploration of real interest rate movements in seven OECD countries from 1967-II to 1979-II. Further research is needed on real rates in other countries for several reasons. Not only are measures of foreign real rates of interest in their ownright, but extending an analysis of real rates to other countries also has the following additional benefits: it can generate more powerful statistical tests of propositions previously tested on U.S. data and yield information on whether results found for the U.S. hold up in other countries.This study pursues several questions that have arisen naturally from this earlier work. Is the hypothesis that the real rate is constant rejected when the analysis is extended to other countries? Does the real rate decline with increased inflation and money growth in other countries besides the United States? How reliable is the Fisher effect, in which nominal interestrates reflect changes in expected inflation? Are movements in nominal interest rates a reliable indicator of movements in real rates? What kind of variationsin real interest rates are there in different countries? Have real rates declined from the '60s to the '70s for other countries besides the U.S.?(This abstract was borrowed from another version of this item.)

Economic growth in advanced countries has slowed in successive stages since the 1970s and, since the crisis, has fallen to a historical low compared with the 20th century. This slowdown is mainly attributable to weaker growth in total factor productivity. In emerging countries, the situation varies: in some countries, such as South Korea and Chile, GDP per capita have been converging for several decades; in others, such as Argentina, Brazil and Mexico, relative GDP per capita has stagnated or even declined. While weak long-term growth in these latter countries can be attributed to a lack of appropriate institutions, the widespread slowdown observed in advanced countries is more difficult to interpret. One possible explanation that we explore is the decline in real interest rates since the 1990s. A circular relationship appears to exist between interest rates and productivity: productivity determines long-term returns on capital and thereby interest rates; interest rates in turn determine the minimum productivity expected from investment projects. The decline in real interest rates, which is in part attributable to demographic factors, may have led to a slowdown in productivity by making an increasing number of unproductive companies and projects profitable. We illustrate this circular relationship using a cross-country panel regression. One way of breaking out of the circular relationship would be via a new technological revolution linked to the digital economy, or, in countries where there is still room for convergence, via structural reforms to improve the diffusion of Information and Communication Technologies (ICT).

Chapter 2 delves into the historical development of inflation (the increase in prices of goods and services) and real interest rates, which are nominal interest rates adjusted for inflation. The chapter highlights that, similar to nominal interest rates, inflation rates have also decreased since the early 1980s. It demonstrates that nominal interest rates have fallen more than inflation rates over the past four decades, leading to a decline in real interest rates. The chapter contrasts the changes in real interest rates during 1980–2020 with earlier periods, revealing that while nominal interest rates were at historical lows just before the pandemic, real interest rates were low but not at their lowest level ever.

The paper finds significant deviations between short-term emerging market real interest rates and world real interest rates primarily due to the inflationary expectations of the local investor base. We test for long-run real interest convergence in emerging markets using a time varying panel unit root test proposed by Pesaran to capture the improved macro-economic fundamentals since early 1990s. We also estimate the speed of convergence in the presence of a shock. The paper suggests that real interest rates in the emerging markets show some convergence in the long run but real interest parity does not hold. Our results also find that the speed of adjustment of real rates to a shock is estimated to differ significantly across the emerging markets. Measured by their half-life, some emerging markets in Asia, E.Europe and S.Africa, where real interest rates are generally low, take much longer to adjust than where real interest rates are generally high (Latin America, Turkey). From a policy perspective, encouraging foreign investors to take direct exposure at the short end of the local debt market could lower the real interest rates in some emerging markets.

We study long run correlations between safe real interest rates in the U.S. and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We find that safe real interest rates are correlated as expected with demographic measures. For example, the long run correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long run correlation with the proportion of 40 to 64 year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not find productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long run correlations that are statistically or economically large in some samples and by some measures but not in others.

PurposeThe purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia.Design/methodology/approachThe data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates.FindingsThe results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks.Originality/valueThis study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.

This paper outlines an approach to measuring real interest rates and testing hypotheses on their behavior. It then describes what we know about real interest rates in the aggregate economy and provides estimates of real interest rates for the agricultural sector. The evidence presented in this paper indicates that real interest rates for the agricultural economy have been extremely high in the l98Ds and that their behavior seems to be linked to that found for real rates in the aggregate economy. What has been the source of these high real rates? The answer seems to be that it was a result of a concerted effort by the monetary authorities to disinflate the economy. However, the brunt of the Fed's disinflationary policy has fallen more heavily on the farm sector which has had to face far higher reel rates than the rest of the economy. Although breaking the back of inflation was certainly a worthy goal for the Fed, farmers have had to pay a heavy price. They have had to suffer for the sins of an economy that was excessively inflationary, which then had to be brought back into line with disinflationary policy.

Monetary policy regime shifts and the unusual behavior of real interest rates

Equilibrium real interest rates and the financial cycle: Empirical evidence for Euro area member countries

<p class="ber">Prevailing economic theory suggests an important distinction between nominal and real values. This concept of purchasing power helps explain the motivation behind basic economic decisions such as whether to invest, save, or consume. Consumers and businesses that make decisions without consideration of purchasing power are assumed to exhibit “money illusion”, the failure to adjust nominal values for changes in prices. The standard assumption used for macroeconomic theory and modeling is that consumers and investors lack money illusion, that is, their consumption and investment responds to real variables. This study tests this standard assumption, and examines the effects of nominal and real interest rates on home buying attitudes using micro-data from the University of Michigan: Survey of Consumers. More specifically, the purpose of this research is to compare the impact of various mortgage rates on home buying optimism including the traditional 30-year-fixed rate, the personal real rate calculated using respondents’ one and five-year inflation expectations, and the market real rate calculated from the 30-year TIPS breakeven rate. This is the first study that tests person-specific real rates generated from survey data in addition to market-wide real rates to answer this question. Across all models, results reveal that the nominal rate is more highly influential than real rates in determining home buying optimism. These results have implications for further adjustment to standard macroeconomic modeling.</p>

International real interest rate parity with error correction models

Is the Euro area as a whole, or are individual Euro-area member countries facing a period of sustained lower economic growth, a phenomenon known as secular stagnation? We tackle this question by estimating equilibrium real interest rates and comparing them to actual real rates. Since the financial crisis has altered the degree of leverage in several European economies, we expand our model to incorporate the financial cycle. We estimate the model for the Euro area as a whole and for nine Euro-area member countries. Incorporating the financial cycle changes the estimated equilibrium real interest rates: For some Euro-area member countries, estimates of the equilibrium real interest rate are substantially higher than the standard estimates. In other cases, including our estimates for the Euro area as a whole, the estimated equilibrium real rates are slightly lower than without taking the financial cycle into account but are still higher than the actual rates. This indicates that real monetary policy rates were set even more systematically and consistently below (or not as far above) the natural real rate. Comparing the sequence of actual and equilibrium real rates, only Belgium, France, and Greece are likely to face a period of secular stagnation.