An alternative approach to the estimation of the real rate of interest
The paper provides an alternative method of estimating the real rate of interest, one that does not first require estimation of the expected rate of inflation. The method permits estimation of the real rate of interest from the "real side" of the economy rather than the "money side" using the assumption that capital and debt instruments are close substitutes in investor protfolios so that their rates of return are roughly equal over time. A comparison of the statistical properties of our estimate with both adaptive and rational estimates of the real rate based on the Fisher Equation raises further questions about the appropriate measure of the real rate used to evaluate the impact of economic policy on aggregate demand.
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