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Suspicious Estimates of Ex Ante Real Interest Rates: Evidence of Macroeconomic Malpractice?

Author

Listed:
  • Lee C. Spector

    () (Department of Economics, Ball State University)

  • Courtenay C. Stone

    () (Department of Economics, Ball State University)

Abstract

The ex ante real rate of interest is an important concept in economics and finance. These disciplines treat Irving Fischer’s theory of interest as canonical; it is used universally. In the world as we know it, the Fisher theory requires positive ex ante real interest rates. Consequently, empirical estimates of the ex ante real interest rate derived from the Fisher theory of interest should also be positive. Virtually all estimates of the ex ante real interest rate published in economic journals and/or used in macroeconomic models and policy discussions for the past 35 years, however, contain negative values for extended time periods. These negative ex ante real interest rate estimates would thus seem to be theoretically flawed. Moreover, it was shown more than 30 years ago that the procedures generally used to estimate ex ante real interest rates produce biased estimates. We document this problem, explore why it exists, and assess alternative approaches for estimating the ex ante real interest rate.

Suggested Citation

  • Lee C. Spector & Courtenay C. Stone, 2010. "Suspicious Estimates of Ex Ante Real Interest Rates: Evidence of Macroeconomic Malpractice?," Working Papers 201010, Ball State University, Department of Economics, revised Oct 2010.
  • Handle: RePEc:bsu:wpaper:201010
    as

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    File URL: http://econfac.iweb.bsu.edu/research/workingpapers/bsuecwp201010r1spector.pdf
    File Function: First version, October 2010
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    References listed on IDEAS

    as
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    2. Philip R. P. Coelho & James E. McClure, 2005. "Theory versus Application: Does Complexity Crowd Out Evidence?," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 556-565, January.
    3. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2005. "The monetary instrument matters," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 633-658.
    4. Bullard, James B., 2013. "Seven Faces of "The Peril"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 613-628.
    5. Alejandro Justiniano & Giorgio E. Primiceri, 2010. "Measuring the equilibrium real interest rate," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 14-27.
    6. Weber Ernst Juerg, 2010. "The Role of the Real Interest Rate in U.S. Macroeconomic History," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-26, April.
    7. William T. Gavin, 2010. "Deflation and the Fisher equation," Economic Synopses, Federal Reserve Bank of St. Louis.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    ex ante real interest rate; estimation problems;

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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