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Risk Effects Versus Monetary Effects in the Determination of Short-term Interest Rates

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  • Malcolm L. Edey

    (Reserve Bank of Australia)

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    Abstract

    Economic theory offers two distinct approaches to the modelling of interest rates. At the microeconomic level, interest rates are modelled as an outcome of intertemporal optimisation by investors, so that real interest rates are determined entirely by the real variables that characterise risk. At the macroeconomic level, short term behaviour of interest rates is usually thought of as being governed by the money demand function. This paper tests a model that encompasses both views, using data for four countries. The results suggest that risk factors are empirically insignificant in explaining interest rate behaviour.

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    File URL: http://www.rba.gov.au/publications/rdp/1987/8708.html
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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp8708.

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    Date of creation: Oct 1987
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    Handle: RePEc:rba:rbardp:rdp8708

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