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An Analysis of the Real Interest Rate under Regime Shifts

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  • Garcia, Rene
  • Perron, Pierre

Abstract

The authors consider the time-series behavior of the U.S. real interest rate from 1961 to 1986, using the methodology of James D. Hamilton (1989), by allowing three possible regimes affecting both the mean and variance. The results suggest that the ex-post real interest rate is essentially random with means and variances that are different for the periods 1961-73, 1973-80, and 1980-86. The inflation rate series also shows interesting shifts in both mean and variance. Series for the ex-ante real interest rate and expected inflation are constructed. Finally, the authors make clear how their results can explain some recent findings in the literature. Copyright 1996 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 78 (1996)
Issue (Month): 1 (February)
Pages: 111-25

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Handle: RePEc:tpr:restat:v:78:y:1996:i:1:p:111-25

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Web page: http://mitpress.mit.edu/journals/

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  2. Antoncic, Madelyn, 1986. "High and Volatile Real Interest Rates: Where Does the Fed Fit In?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 18-27, February.
  3. Bonomo, Marco & Garcia, Rene, 1996. "Consumption and equilibrium asset pricing: An empirical assessment," Journal of Empirical Finance, Elsevier, vol. 3(3), pages 239-265, September.
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  19. Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
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  21. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
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  24. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
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  26. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 755-765, November.
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  28. Logue, Dennis E & Willett, Thomas D, 1976. "A Note on the Relation between the Rate and Variability of Inflation," Economica, London School of Economics and Political Science, vol. 43(17), pages 151-58, May.
  29. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
  30. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
  31. Engle, Robert F, 1983. "Estimates of the Variance of U.S. Inflation Based upon the ARCH Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 286-301, August.
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