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World Real Interest Rates

In: NBER Macroeconomics Annual 1990, Volume 5

  • Robert J. Barro
  • Xavier Sala-i-Martin

We think of the expected real interest rate for ten OECD countries (our counterpart of the world economy) as determined by the equation of aggregate investment demand to aggregate desired saving. Stock-market returns isolate shifts to investment demand, and changes in oil prices, monetary growth, and fiscal variables isolate shifts to desired saving. We estimated the reduced form for CDP-weighted world averages of the expected short-term real interest rate and the investment ratio over the period 1959-88. The estimates reveal significant effects in the predicted direction for world stock returns, oil prices, and world monetary growth, but fiscal variables turned out to be unimportant. Structural estimation implies that an increase by one percentage point in the expected real interest rate raises the desired saving rate by onethird of a percentage point. Simulations of the model indicated that fluctuations in world stock returns and oil prices explain a good deal of the time series for the world average of expected real interest rates; specifically, why the rates were low in 1974-79 and high in 1981-86. The model also explains the fall in real rates in 1987-88 and the subsequent upturn in 1989. The fitted relation forecasts an increase in the world average of real interest rates in 1990 to a value, 5.6 %, that is nearly a full percentage point above the highest value attained in the entire prior sample, 1958-89. We estimated systems of equations for individual countries' expected real interest rates and investment ratios. One finding is that each country's expected real interest rate depends primarily on world factors, rather than own-country factors, thereby suggesting a good deal of integration of world capital and goods markets.

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This chapter was published in:
  • Olivier Jean Blanchard & Stanley Fischer, 1990. "NBER Macroeconomics Annual 1990, Volume 5," NBER Books, National Bureau of Economic Research, Inc, number blan90-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10972.
    Handle: RePEc:nbr:nberch:10972
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Barro, Robert J., 1981. "Intertemporal substitution and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 14(1), pages 237-268, January.
    2. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
    3. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-57, December.
    5. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
    6. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
    7. Summers, Robert & Heston, Alan, 1988. "A New Set of International Comparisons of Real Product and Price Levels Estimates for 130 Countries, 1950-1985," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(1), pages 1-25, March.
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