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Sources of Variation in International Real Interest Rates

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  • Allan W. Gregory
  • David G. Watt

Abstract

This paper analyses the effects of inflation on ex-post real interest rates in an international framework. A dynamic factor model is estimated in which real interest rates are influenced by real interest and inflation factors that are common to all the countries, and by country- specific factors. We find that the source of domestic inflation is an important determinant of the effect of inflation on real interest rates. A common inflation factor has a negative effect on ex-post real interest rates lending support to a form of the Mundell-Tobin effect in international real interest rates, and that a country-specific inflation factor tends to have a positive effect.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_923.pdf
File Function: First version 1995
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 923.

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Length: 35 pages
Date of creation: Mar 1995
Date of revision:
Handle: RePEc:qed:wpaper:923

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Related research

Keywords: real interest rates; world components; Kalman filter; scoring;

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Cited by:
  1. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
  2. Head, Allen C. & Smith, Gregor W., 2003. "The CCAPM meets Euro-interest rate persistence, 1960-2000," Journal of International Economics, Elsevier, vol. 59(2), pages 349-366, March.
  3. Mardi Dungey & Vance L Martin & Adrian R Pagan, 2000. "A multivariate latent factor decomposition of international bond yield spreads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 697-715.
  4. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  5. Renee Fry & Vance Martin & Brenda González-Hermosillo & Mardi Dungey, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 02/74, International Monetary Fund.

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