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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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    Cited by:

    1. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
    2. Man-Keung Tang, 2007. "Private-Sector Financial Liabilities in Advanced Economies; Is More Better?," IMF Working Papers 07/118, International Monetary Fund.
    3. Suzan Hol, 2006. "Determinants of long-term interest rates in the Scandinavian countries," Discussion Papers 469, Statistics Norway, Research Department.
    4. Gros, Daniel, 1998. "EMU and capital markets: The institutional framework," CFS Working Paper Series 1998/04, Center for Financial Studies (CFS).
    5. Belke, Ansgar & Polleit, Thorsten, 2006. "Money and Swedish inflation," Journal of Policy Modeling, Elsevier, vol. 28(8), pages 931-942, November.
    6. Borio, Claudia & Disyatat, Piti & Juselius, Mikael & Rungcharoenkitkul, Phurichai, 2017. "Why so low for so long? A long-term view of real interest rates," Research Discussion Papers 36/2017, Bank of Finland.
    7. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    8. Bampinas, Georgios & Panagiotidis, Theodore, 2015. "Are gold and silver a hedge against inflation? A two century perspective," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 267-276.
    9. Reynolds, Douglas B. & Baek, Jungho, 2012. "Much ado about Hotelling: Beware the ides of Hubbert," Energy Economics, Elsevier, vol. 34(1), pages 162-170.
    10. Palle Andersen & David Gruen, 1995. "Macroeconomic Policies and Growth," RBA Annual Conference Volume,in: Palle Andersen & Jacqueline Dwyer & David Gruen (ed.), Productivity and Growth Reserve Bank of Australia.
    11. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    12. Douglas, Justin J. & Bartley, Scott W., 1997. "Risk premia in Australian interest rates," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 41(2), June.
    13. Simone Salotti & Carmine Trecroci, 2016. "The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth," Economica, London School of Economics and Political Science, vol. 83(330), pages 356-384, April.
    14. Alison Tarditi, 1996. "Modelling the Australian Exchange Rate, Long Bond Yield and Inflationary Expectations," RBA Research Discussion Papers rdp9608, Reserve Bank of Australia.
    15. Christian Upper & Andreas Worms, 2003. "Real long-term interest rates and monetary policy: a cross-country perspective," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 234-257 Bank for International Settlements.
    16. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
    17. Ansgar Belke & Thorsten Polleit, 2006. "Money and Swedish Inflation Reconsidered," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 270/2006, Department of Economics, University of Hohenheim, Germany.
    18. Klaus Weyerstrass & Johannes Jaenicke & Reinhard Neck & Gottfried Haber & Bas van Aarle & Koen Schoors & Niko Gobbin & Peter Claeys, 2006. "Economic spillover and policy coordination in the Euro area," European Economy - Economic Papers 2008 - 2015 246, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    19. repec:bla:ausecp:v:56:y:2017:i:2:p:95-118 is not listed on IDEAS
    20. Ardagna, Silvia, 2009. "Financial Markets’ Behavior Around Episodes of Large Changes in the Fiscal Stance," Scholarly Articles 2579824, Harvard University Department of Economics.
    21. Jurgen Stark, 1995. "Solutions for developed economies," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-294.
    22. Carlos Hamilton Vasconcelos Araújo & Osmani Teixeira de Carvalho de Guillén, 2002. "Componentes de Curto e Longo Prazo das Taxas de Juros no Brasil," Working Papers Series 55, Central Bank of Brazil, Research Department.
    23. Chang, Ming-Jen & Su, Che-Yi, 2015. "Does real interest rate parity really hold? New evidence from G7 countries," Economic Modelling, Elsevier, vol. 47(C), pages 299-306.
    24. Kelly R Eckhold, 1998. "Determinants of New Zealand bond yields," Reserve Bank of New Zealand Discussion Paper Series G98/1, Reserve Bank of New Zealand.
    25. Ardagna, Silvia, 2009. "Financial markets' behavior around episodes of large changes in the fiscal stance," European Economic Review, Elsevier, vol. 53(1), pages 37-55, January.

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