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An Analysis of the Real Interest rate Under Regime Shifts

  • Garcia, R.
  • Perron, P.

The authors consider the time-series behavior of the U.S. real interest rate from 1961 to 1986, using the methodology of James D. Hamilton (1989), by allowing three possible regimes affecting both the mean and variance. The results suggest that the ex-post real interest rate is essentially random with means and variances that are different for the periods 1961-73, 1973-80, and 1980-86. The inflation rate series also shows interesting shifts in both mean and variance. Series for the ex-ante real interest rate and expected inflation are constructed. Finally, the authors make clear how their results can explain some recent findings in the literature. Copyright 1996 by MIT Press.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 9428.

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Length: 21 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:mtl:montec:9428
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  17. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, vol. 67(3), pages 478-86, June.
  18. Ahn, Chang Mo & Thompson, Howard E, 1988. " Jump-Diffusion Processes and the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 43(1), pages 155-74, March.
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  28. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
  29. Antoncic, Madelyn, 1986. "High and Volatile Real Interest Rates: Where Does the Fed Fit In?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 18-27, February.
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  35. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
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