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Do interest rates predict real economic activity?


  • John Loizides
  • George Vamvoukas


This paper employs a structural VAR procedure to test some fundamental propositions of the business cycle using a developing economy framework. The focus of the paper is on KBC, MBC and RBC theories as well as on the alternative view, which has been propagated mainly by Sims. The empirical analysis intends to report extensive evidence on the dynamics between money, output, interest rates and prices. The results suggest that the effects of system shocks conform to the alternative view supporting the central role of interest rates. Interest rate shocks explain a majority of the variation in money, output and prices. The results are generally robust across different orderings, alternative interest rate measures and various sample periods.

Suggested Citation

  • John Loizides & George Vamvoukas, 2003. "Do interest rates predict real economic activity?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(9), pages 589-595.
  • Handle: RePEc:taf:apeclt:v:10:y:2003:i:9:p:589-595 DOI: 10.1080/1350485032000090749

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    References listed on IDEAS

    1. Benedict S. C. Fung & Rohit Gupta, 1997. "Cash Setting, the Call Loan Rate, and the Liquidity Effect in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1057-1082, November.
    2. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-257, May.
    3. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    4. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    5. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-1247, December.
    6. Cook, David, 1999. "The liquidity effect and money demand," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 377-390, April.
    7. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    9. Taylor, Mark P, 1987. "Financial Innovation, Inflation and the Stability of the Demand for Broad Money in the United Kingdom," Bulletin of Economic Research, Wiley Blackwell, vol. 39(3), pages 225-233, July.
    10. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
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    Cited by:

    1. Aguiar-Conraria, Luís & Azevedo, Nuno & Soares, Maria Joana, 2008. "Using wavelets to decompose the time–frequency effects of monetary policy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(12), pages 2863-2878.

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