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Measuring Interest Rates as Determined by Thrift and Productivity

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  • Woon Gyu Choi

    (International Monetary Fund)

Abstract

This paper investigates the behavior of real and nominal interest rates by combining consumption- and production-based models into a single general equilibrium framework. Based on the theoretical nonlinear relationships that link interest rates to both the marginal rates of substitution and transformation in a monetary production economy, our study develops an estimation and simulation procedure to predict historical series of interest rates. We find that the model predictions of interest rates are consistent with U.S. data in many respects. However, the model fails to explain the abnormal drift in real rates in the early 1980s and to deliver the smooth movement of nominal rates at high frequencies.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 8 (2007)
Issue (Month): 1 (May)
Pages: 167-195

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Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:167-195

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Keywords: Interest rates; Marginal rate of substitution; Marginal rate of transformation; General equilibrium; Asset pricing;

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