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The Behavior of the Real Rate of Interest

  • Dotsey, Michael
  • Lantz, Carl
  • Scholl, Brian
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    This paper presents new facts regarding the behavior of the ex-ante real rate of interest. These facts are notably different from conventional wisdom about the cyclical properties of the real rate. In particular, we find that the ex-ante real rate is contemporaneously positively correlated with GDP and positively correlated with lagged cyclical output. There is also evidence that high real rates are associated with strong cyclical output one quarter into the future. Our results generally are not sensitive to the estimation methodology, but are quite sensitive to the price series used. This sensitivity is especially true for the Consumer Price Index. Thus, we find evidence of specification uncertainty. We also find that real rate behavior varies over different sample periods and that the cyclical properties of the ex-ante and ex-post real rates are not identical. Therefore, inferring ex-ante real rate behavior using ex-post data is inappropriate.

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    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 35 (2003)
    Issue (Month): 1 (February)
    Pages: 91-110

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    Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:1:p:91-110
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