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Can We Explain Unexpected Fluctuation of Long-Term Real Interest Rate?

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  • Barbora Volna

Abstract

In this paper, we create a model of unexpected fluctuation of the long-term real interest rate. This model is based on our new version of IS-LM model. The new IS-LM model eliminates two main deficiencies of the original model: assumptions of constant price level and of strictly exogenous money supply. The unexpected fluctuations of the long-term real interest rate can be explained by existence of special type of cycle called relaxation oscillation on money (or financial assets) market. Relaxation oscillations include some short parts looking like "jumps". These "jumps" can be interpreted like unexpected. In other words, we try to explain these "unexpected" fluctuations of long-term real interest rate and show that these fluctuations can be only seemingly unexpected. Last but not least, we show some impacts of the government intervention by fiscal or monetary policy on economics using this models. Then we suggest possible interaction between fiscal and monetary policy.

Suggested Citation

  • Barbora Volna, 2012. "Can We Explain Unexpected Fluctuation of Long-Term Real Interest Rate?," Papers 1211.2709, arXiv.org.
  • Handle: RePEc:arx:papers:1211.2709
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    File URL: http://arxiv.org/pdf/1211.2709
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