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Sources of Variation in International Real Interest Rates

Author

Listed:
  • Allan W. Gregory
  • David G. Watt

Abstract

This paper analyses the effects of inflation on ex-post real interest rates in an international framework. A dynamic factor model is estimated in which real interest rates are influenced by real interest and inflation factors that are common to all the countries, and by country- specific factors. We find that the source of domestic inflation is an important determinant of the effect of inflation on real interest rates. A common inflation factor has a negative effect on ex-post real interest rates lending support to a form of the Mundell-Tobin effect in international real interest rates, and that a country-specific inflation factor tends to have a positive effect.

Suggested Citation

  • Allan W. Gregory & David G. Watt, 1995. "Sources of Variation in International Real Interest Rates," Working Papers 923, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:923
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_923.pdf
    File Function: First version 1995
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    Citations

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    Cited by:

    1. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
    2. Head, Allen C. & Smith, Gregor W., 2003. "The CCAPM meets Euro-interest rate persistence, 1960-2000," Journal of International Economics, Elsevier, vol. 59(2), pages 349-366, March.
    3. Mardi Dungey & Vance L Martin & Adrian R Pagan, 2000. "A multivariate latent factor decomposition of international bond yield spreads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 697-715.
    4. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    5. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    6. Renee Fry & Vance Martin & Brenda Gonzalez-Hermosillo & Mardi Dungey, 2002. "International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse," IMF Working Papers 02/74, International Monetary Fund.

    More about this item

    Keywords

    real interest rates; world components; Kalman filter; scoring;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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