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Real Interest Rates and Macroeconomic Activity

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  • Taylor, Mark P

Abstract

While standard discussions of the transmission mechanism of monetary policy tend to assume a strong and negative link between real interest rates and real macroeconomic activity, and this appears to some extent to be borne out by simulation of large-scale macroeconometric models, the empirical evidence suggests that the link between real interest rates and macroeconomic aggregates such as consumption and investment is, in fact, somewhat tenuous. The weak link between interest rates and aggregate consumption may be explained at a theoretical level, while the apparently weak link between interest rates and investment is more puzzling, although it may be related to neglect of issues such as uncertainty and the irreversibility of investment in empirical studies. Similarly, evidence on the link between real interest rates and economic growth is mixed, and this may be related to non-linearities in the relationship. The survey highlights the need for further research in this area. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Taylor, Mark P, 1999. "Real Interest Rates and Macroeconomic Activity," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 95-113, Summer.
  • Handle: RePEc:oup:oxford:v:15:y:1999:i:2:p:95-113
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    Cited by:

    1. Kanas, Angelos, 2008. "On real interest rate dynamics and regime switching," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2089-2098, October.
    2. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    3. Gerald Epstein, 2002. "Employment-Oriented Central Bank Policy in an Integrated World Economy: A Reform Proposal for South Africa," Working Papers wp39, Political Economy Research Institute, University of Massachusetts at Amherst.
    4. repec:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0028-7 is not listed on IDEAS
    5. Mustafa Caglayan & Rebeca Muñoz Torres, 2011. "The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry," Open Economies Review, Springer, vol. 22(4), pages 669-683, September.
    6. Bonatti, Luigi, 2005. "Growth and employment differentials under alternative wage-setting institutions and integrated capital markets," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 724-746, December.
    7. Mésonnier, J-S., 2006. "The Reliability of Macroeconomic Forecasts based on Real Interest Rate Gap Estimates in Real Time: an Assessment for the Euro Area," Working papers 157, Banque de France.
    8. James Obben & Monique Waayer, 2011. "New Zealand's old-age pension scheme and household saving," International Journal of Social Economics, Emerald Group Publishing, vol. 38(9), pages 767-788, August.
    9. Anthony J. Makin, 2015. "Expansionary Versus Contractionary Government Spending," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 56-65, January.
    10. Keiran Sharpe, 2006. "Effective demand in a stylised Keynesian model of growth," Review of Political Economy, Taylor & Francis Journals, vol. 18(2), pages 173-191.
    11. Panos Patatoukas & Hongjun Yan, 2009. "The Impact of Earnings Surprises on Stock Returns: Theory and Evidence," Yale School of Management Working Papers amz2517, Yale School of Management.
    12. Engelbert Stockhammer, 2012. "Still Unemployed, After All These Wage Cuts. Labor in Europe," Chapters,in: Employment, Growth and Development, chapter 6 Edward Elgar Publishing.
    13. Stracca, Livio, 2005. "Liquidity and real equilibrium interest rates: a framework of analysis," Working Paper Series 542, European Central Bank.
    14. Jean-Stéphane MESONNIER, 2007. "The predictive content of the real interest rate gap for macroeconomic variables in the euro area," Money Macro and Finance (MMF) Research Group Conference 2006 102, Money Macro and Finance Research Group.
    15. Anthony J. Makin, 2007. "Re-Examining The Effectiveness Of Stabilisation Policy," Australian Economic Papers, Wiley Blackwell, vol. 46(4), pages 348-359, December.
    16. Maslov, Alexander, 2011. "Inflationary Handicap Of The Monetary Transmission Mechanism: Evidence From Russia," MPRA Paper 50036, University Library of Munich, Germany, revised 12 Apr 2012.
    17. repec:eee:ecolec:v:146:y:2018:i:c:p:26-34 is not listed on IDEAS
    18. Eyraud, Luc & Clements, Benedict & Wane, Abdoul, 2013. "Green investment: Trends and determinants," Energy Policy, Elsevier, vol. 60(C), pages 852-865.
    19. Saba Mushtaq & Danish Ahmed Siddiqui, 2016. "Effect of interest rate on economic performance: evidence from Islamic and non-Islamic economies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-14, December.

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