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The Behavior of the Real Rate of Interest

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  • Dotsey, Michael
  • Lantz, Carl
  • Scholl, Brian
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    Abstract

    This paper presents new facts regarding the behavior of the ex-ante real rate of interest. These facts are notably different from conventional wisdom about the cyclical properties of the real rate. In particular, we find that the ex-ante real rate is contemporaneously positively correlated with GDP and positively correlated with lagged cyclical output. There is also evidence that high real rates are associated with strong cyclical output one quarter into the future. Our results generally are not sensitive to the estimation methodology, but are quite sensitive to the price series used. This sensitivity is especially true for the Consumer Price Index. Thus, we find evidence of specification uncertainty. We also find that real rate behavior varies over different sample periods and that the cyclical properties of the ex-ante and ex-post real rates are not identical. Therefore, inferring ex-ante real rate behavior using ex-post data is inappropriate.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 35 (2003)
    Issue (Month): 1 (February)
    Pages: 91-110

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    Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:1:p:91-110

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Adrien Verdelhan, 2005. "A Habit-Based Explanation of the Exchange Rate Risk Premium," Boston University - Department of Economics - Working Papers Series WP2005-032, Boston University - Department of Economics.
    2. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
    3. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642.
    4. Mertens, Elmar, 2010. "Structural shocks and the comovements between output and interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1171-1186, June.
    5. Christophe Chamley, 2006. "Complementarities in information acquisition with short-term trades," Boston University - Department of Economics - Working Papers Series WP2006-042, Boston University - Department of Economics.
    6. Echeverria Garaigorta, Paulina Elisa & Iza Padilla, María Amaya, 2011. "Business cycles in a small open economy: The case of Hong Kong," DFAEII Working Papers 2011-07, University of the Basque Country - Department of Foundations of Economic Analysis II.
    7. Guimarães, Bernardo, 2007. "Optimal external debt and default," CEPR Discussion Papers 6035, C.E.P.R. Discussion Papers.
    8. Pierre Perron† & Tatsuma Wada, 2005. "Let’s Take a Break: Trends and Cycles in US Real GDP?," Boston University - Department of Economics - Working Papers Series WP2005-031, Boston University - Department of Economics, revised Oct 2005.
    9. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, vol. 51(7), pages 1768-1784, October.
    10. Mésonnier, J-S. & Renne, J-P., 2004. "A Time-Varying Natural Rate for the Euro Area," Working papers 115, Banque de France.
    11. Nakaota, Hiroshi, 2005. "The term structure of interest rates in Japan: the predictability of economic activity," Japan and the World Economy, Elsevier, vol. 17(3), pages 311-326, August.
    12. Elmar Mertens, 2005. "Puzzling Comovements between Output and Interest Rates? Multiple Shocks are the Answer," Working Papers 05.05, Swiss National Bank, Study Center Gerzensee.

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