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Determinants of Long-term Interest Rates in the Czech Republic


  • Tomáš Holinka

    () (Czech National Bank, Prague)


The paper analyses the factors leading to the fall of long-term interest rates in the Czech Republic – respectively, the long-term interest rate differential in the Czech Republic and the Eurozone – between 1998 and 2003. The selection of factors is determined by the Fisher equation, UIP, PPP, expectation hypothesis and neoclassical growth theory. The paper suggests that falling long-term interest rates may have been affected by an expectation of lower short-term rates due to falling inflation expectations and inflation premiums. The decrease of CZK/EUR long-term rate differentials from 4 % to 0 % can approximately be explained by the one-third decrease of inflation expectations in the Czech Republic and by the 50% decrease of the relative inflation premium. In the long term, the effect of Czech National Bank monetary policy is dwindling vis-à-vis European Central Bank policy, i.e., euro interest rates. Another factor is the anticipated entry of the Czech Republic into the Economic Monetary Union. The real interest-rate differential has no effect.

Suggested Citation

  • Tomáš Holinka, 2005. "Determinants of Long-term Interest Rates in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(7-8), pages 363-379, July.
  • Handle: RePEc:fau:fauart:v:55:y:2005:i:7-8:p:363-379

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    References listed on IDEAS

    1. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters,in: The Inflation-Targeting Debate, pages 201-246 National Bureau of Economic Research, Inc.
    2. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
    3. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
    4. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    5. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    6. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    7. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    8. Hasan Bakhshi & Anthony Yates, 1998. "Are UK inflation expectations rational?," Bank of England working papers 81, Bank of England.
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    More about this item


    long-term interest rates; expectation hypothesis; UIP; PPP; growth theory; inflation expectations; premium;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies


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