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Mr. Wicksell and the global economy: What drives real interest rates?

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Author Info
Michal Brzoza-Brzezina ()
Jesus Crespo Cuaresma ()

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Abstract

We use a Bayesian dynamic latent factor model to extract world, regional and country factors of real interest rate series for 22 OECD economies. We find that the world factor plays a privileged role in explaining the variance of real rates for most countries in the sample, and accounts for the steady decrease in interest rates in the last decades. Moreover, the relative contribution of the world factor is rising over time. We also find relevant differences between the group of countries that follow fixed exchange rate strategies and those with flexible regimes.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2007-06.

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Length: 29 pages
Date of creation: Apr 2007
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Handle: RePEc:inn:wpaper:2007-06

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Related research
Keywords: Real interest rates; natural rate of interest; Bayesian dynamic factor models.;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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