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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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    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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