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

Listed author(s):
  • Lee C. Spector

    ()

    (Department of Economics, Ball State University)

  • Courtenay C. Stone

    ()

    (Department of Economics, Ball State University)

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.

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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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Paper provided by Ball State University, Department of Economics in its series Working Papers with number 201010.

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Length: 25 pages
Date of creation: Oct 2010
Date of revision: Oct 2010
Handle: RePEc:bsu:wpaper:201010
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  1. 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.
  2. Ferraro Paul J & Taylor Laura O, 2005. "Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-14, September.
  3. 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.
  4. Bullard, James B., 2013. "Seven Faces of "The Peril"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 613-628.
  5. 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.
  6. William T. Gavin, 2010. "Deflation and the Fisher equation," Economic Synopses, Federal Reserve Bank of St. Louis.
  7. 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.
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