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Why Are Real Interest Rates So High?

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  • Zvi Bodie
  • Alex Kane
  • Robert L. McDonald

Abstract

This paper applies the Capital Asset Pricing Model to help explain the anomalous behavior of real interest rates during the last several years. Specifically,we are able to show that the increased volatility of bond prices since the change in Federal Reserve operating procedure in October 1979 has substantially increased the required real risk premium on long term bonds. We also consider and reject the possibility that increased risk alone accounts for the recent increase in the short-term real rate. Finally, we use the model to simulate the financial effects of a Federal debt maturity management operation.

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File URL: http://www.nber.org/papers/w1141.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1141.

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Date of creation: Jun 1983
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Publication status: published as Bodie, Zvi, Alex Kane and Robert L. McDonald. Why Haven't Nominal Rates Declined?" Financial Analysts Journal, Vol. 4 No. 2, (March-April 1984), pp. 16-27.
Handle: RePEc:nbr:nberwo:1141

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References

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  1. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 36(4), pages 769-99, September.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-80, Wharton School Rodney L. White Center for Financial Research.
  4. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 4(04), pages 347-400, December.
  5. Zvi Bodie, 1979. "Inflation Risk and Capital Market Equilibrium," NBER Working Papers 0373, National Bureau of Economic Research, Inc.
  6. Robert S. Pindyck, 1983. "Risk, Inflation, and the Stock Market," NBER Working Papers 1186, National Bureau of Economic Research, Inc.
  7. Irwin Friend & Joel Hasbrouck, . "Effect of Inflation on the Profitability and Valuation of U.S. Corporations," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 4-82, Wharton School Rodney L. White Center for Financial Research.
  8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
  9. Zvi Bodie & Alex Kane & Robert L. McDonald, 1985. "Inflation and the Role of Bonds in Investor Portfolios," NBER Working Papers 1091, National Bureau of Economic Research, Inc.
  10. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, American Economic Association, vol. 69(5), pages 915-26, December.
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Cited by:
  1. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  2. John A. Tatom, 1984. "Interest rate variability: its link to the variability of monetary growth and economic performance," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Nov, pages 31-47.
  3. Pindyck, Robert S., 1986. "Risk aversion and determinants of stock market behavior," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1801-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Alex Kane & Young Ki Lee, 1983. "The Forecasting Ability of Money Market Fund Managers and its Economic Value," NBER Working Papers 1243, National Bureau of Economic Research, Inc.
  5. Ray Chou & Robert F. Engle & Alex Kane, 1991. "Measuring Risk Aversion From Excess Returns on a Stock Index," NBER Working Papers 3643, National Bureau of Economic Research, Inc.
  6. Koedijk, Kees & Kool, Clemens & Nissen, Francois, 1998. "Real interest rates and shifts in macroeconomic volatility," Journal of Empirical Finance, Elsevier, Elsevier, vol. 5(3), pages 241-261, September.
  7. Jeffrey A. Frankel, 1983. "A Test of Portfolio Crowding-Out and Related Issues in Finance," NBER Working Papers 1205, National Bureau of Economic Research, Inc.

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