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Determinants of Long-term Interest Rates in the Czech Republic

Listed author(s):
  • Tomáš Holinka


    (Czech National Bank, Prague)

Registered author(s):

    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.

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    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 55 (2005)
    Issue (Month): 7-8 (July)
    Pages: 363-379

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    Handle: RePEc:fau:fauart:v:55:y:2005:i:7-8:p:363-379
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