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Real Interest Rates, Nominal Shocks, and Real Shocks

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  • Driffill, John

Abstract

This paper uses a structural time-series analysis to analyse the properties of ex-ante real interest rates of the five major OECD economies in relation to temporary and permanent shocks to real output. Following Blanchard and Quah (1989) we refer to these innovations as ‘nominal’ and ‘real’ shocks respectively. The relationships of rates to these shocks appear to be qualitatively consistent with predictions of stochastic general equilibrium models of business cycles driven by both real and nominal disturbances. Real and nominal shocks originating in the United States are found to be the most important causes of persistence in ex-ante real interest rates, but of the two, only nominal shocks cause dynamic movements in rates that are coherent across all countries. Further results indicate that the rise in real interest rates experienced by these countries in the early 1980s was mainly due to nominal shocks in all five countries; real shocks played little or no role.

Suggested Citation

  • Driffill, John, 1997. "Real Interest Rates, Nominal Shocks, and Real Shocks," CEPR Discussion Papers 1647, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1647
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    More about this item

    Keywords

    Real and Nominal Shocks; Real Interest Rates; Structural VARs;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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