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

Author

Listed:
  • Michal Brzoza-Brzezina

    (National Bank of Poland and Warsaw School of Economics)

  • Jesus Crespo Cuaresma

    (Department of Economics, University of Vienna, Bruennerstrasse 72, A-1210 Vienna (Austria))

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.

Suggested Citation

  • Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2008. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 139, Oesterreichische Nationalbank (Austrian Central Bank).
    • Handle: RePEc:onb:oenbwp:139
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    File URL: https://www.oenb.at/dam/jcr:31341ece-84b6-41f7-b3d2-12de35544acd/wp139_tcm16-81420.pdf
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    References listed on IDEAS

    as
    1. Brigitte Desroches & Michael Francis, 2006. "Global Savings, Investment, and World Real Interest Rates," Bank of Canada Review, Bank of Canada, vol. 2006(Winter), pages 3-17.
    2. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74, National Bureau of Economic Research, Inc.
    3. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
    4. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    5. Owen F. Humpage, 2005. "Have international developments lowered the neutral rate?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    6. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    7. Otrok, Christopher & Whiteman, Charles H, 1998. "Bayesian Leading Indicators: Measuring and Predicting Economic Conditions in Iowa," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 997-1014, November.
    8. Mancuso, Anthony J. & Goodwin, Barry K. & Grennes, Thomas J., 2003. "Nonlinear aspects of capital market integration and real interest rate equalization," International Review of Economics & Finance, Elsevier, vol. 12(3), pages 283-303.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Michał Brzoza-Brzezina
      by Metablog Obserwatora Finansowego in Obserwator Finansowy on 2009-12-10 17:59:58

    Citations

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    Cited by:

    1. Natalie Labuschagne & Polly Vowles, 2010. "Why are Real Interest Rates in New Zealand so High? Evidence and Drivers," Treasury Working Paper Series 10/09, New Zealand Treasury.
    2. Michał Brzoza-Brzezina & Jacek Kotłowski, 2009. "Bezwzględna stopa inflacji w gospodarce polskiej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 9, pages 1-21.
    3. Michal Brzoza-Brzezina & Jacek Kotlowski, 2009. "Estimating pure inflation in the Polish economy," Working Papers 37, Department of Applied Econometrics, Warsaw School of Economics.

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    More about this item

    Keywords

    Real interest rates; natural rate of interest; Bayesian dynamic factor models.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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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