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The Determinants of Real Long-Term Interest Rates: 17 Country Pooled-Time-Series Evidence

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  • Adrian Orr
  • Malcolm Edey
  • Michael Kennedy

Abstract

In this paper a model is presented and estimated that explains real long-term interest rates in terms of developments in low-frequency and high-frequency economic factors in a multi-country framework, using a data set covering 17 OECD countries since the early-1980s. A simultaneous estimation procedure is adopted (using instrumental variables), with an error correction framework for each country separating the low-frequency fundamental influences on real rates from the higher-frequency short-term dynamics. Parameters of the low-frequency variables are constrained to be equal across countries, which imposes the requirement that they have consistent effects both on behaviour through time and in explaining cross-country interest differentials. The results indicate that the low-frequency component of real rates is determined by fundamentals such as the rate of return on business capital, portfolio risk, inflation uncertainty, and indicators of future saving and investment ... Cet article présente un modèle international où les taux d’intérêt à long terme évoluent en fonction des déterminants économiques de long terme et des dynamiques de court terme. Ce modèle a été estimé pour 17 pays, à partir de données remontant au début des années 80. Une procédure d’estimation à équations simultanées est utilisée (à l’aide de variables instrumentales) dans le cadre d’un modèle à correction d’erreur qui, pour chaque pays, distingue l’influence des variables fondamentales tendancielles sur les taux réels de la dynamique de court terme. Les paramètres des variables tendancielles sont contraints à être égaux entre les pays. Cette restriction impose des effets cohérents à la fois sur leurs comportements dans le temps et sur leurs capacités à expliquer les différentiels de taux d’intérêt entre pays. Les résultats indiquent que la composante tendancielle des taux réels est déterminée par des données fondamentales de l’économie tels que le taux de rendement sur le capital ...

Suggested Citation

  • Adrian Orr & Malcolm Edey & Michael Kennedy, 1995. "The Determinants of Real Long-Term Interest Rates: 17 Country Pooled-Time-Series Evidence," OECD Economics Department Working Papers 155, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:155-en
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    File URL: http://dx.doi.org/10.1787/375710201525
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    1. Man-Keung Tang, 2007. "Private-Sector Financial Liabilities in Advanced Economies; Is More Better?," IMF Working Papers 07/118, International Monetary Fund.
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    7. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia.
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