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The Real Interest Rate Spread as a Monetary Policy Indicator

Author Info

  • Browne, Frank

    (Central Bank and Financial Services Authority of Ireland)

  • Everett, Mary

    (Central Bank and Financial Services Authority of Ireland)

Abstract

This paper employs a consumption-based capital asset pricing model to derive the generalised Fisher equation, in order to estimate the natural rate of interest and corresponding real interest rate spread for the US. Analysis reveals not only is the estimated real interest rate spread a useful measure of the degree of looseness/tightness in the Federal Reserve’s monetary policy stance, but also the variable contributes substantially to an understanding of the evolution of US inflation over the period 1960-2005.

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File URL: http://www.centralbank.ie/publications/documents/6RT06.pdf
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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 6/RT/06.

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Length: 52 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:cbi:wpaper:6/rt/06
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  1. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  2. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-66, November.
  3. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
  4. Katharine S. Neiss and Edward Nelson, 2001. "The Real Interest Rate Gap as an Inflation Indicator," Computing in Economics and Finance 2001 145, Society for Computational Economics.
  5. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  6. Koedijk, Kees & Kool, Clemens & Nissen, Francois, 1998. "Real interest rates and shifts in macroeconomic volatility," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 241-261, September.
  7. Tzavalis, E. & Wickens, M.R., 1995. "Forecasting Inflation from the Term Structure," Discussion Papers 9519, Exeter University, Department of Economics.
  8. Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
  9. A. Steven Holland, 1984. "Real interest rates: what accounts for their recent rise?," Review, Federal Reserve Bank of St. Louis, issue Dec, pages 18-29.
  10. Evans, Martin & Wachtel, Paul, 1992. "Interpreting the Movements in Short-Term Interest Rates," The Journal of Business, University of Chicago Press, vol. 65(3), pages 395-429, July.
  11. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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