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Government Purchases and Real Interest Rates

Government Purchases and Real Interest Rates

In response to a temporary increase in government purchases, the contemporaneous short-term rate falls while some forward rates rise.... The Model.[r]

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The Determinants of Real Long-Term Interest Rates

The Determinants of Real Long-Term Interest Rates

The importance of these anticipatory influences can perhaps be illustrated by the rise in real rates during 1994. The magnitude and timing of this rise was very difficult to explain in many countries by any specific event. However, it is plausible that the longer-term prospects for saving and investment balances may have changed significantly, prompting adjustments in real rates. One possible culprit was the absence of fiscal consolidation in several countries despite improved economic conditions, signalling possible future domestic saving pressures. On a more positive note, several countries may have good reason to expect higher future returns on investment, following significant structural adjustment policies and, to some extent, higher real interest rates might reflect increases in expected future profitability. Consistent with globally integrated capital markets, the transmission of real rate movements from larger to smaller countries -- for example, responses to the monetary policy tightening in the United States -- also played a significant role. In sum, given that real interest rates are determined so as to equilibrate ex ante saving and investment, for estimation purposes it is useful to separate their determinants into low-frequency and high-frequency components. Low-frequency determinants can be thought of as the fundamentals that influence saving and investment trends, while high-frequency determinants are those which proxy the movements in expectations about these fundamental factors. In this framework, it is plausible that the low-frequency fundamentals operate consistently in all countries (i.e. they have equal coefficients across countries), while expectation’s formation varies across countries, given that agents are anticipating country-specific developments.
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Real interest rates equalization: The case of Malaysia and Singapore

Real interest rates equalization: The case of Malaysia and Singapore

The data are of monthly frequency and cover two countries namely Malaysia and Singapore are included in this study and covers the 1977Q1 – 2005Q3 period. The nominal interest rates are proxy by Interbank Overnight interest rates, 3 Months Treasury Bill rates, Saving Deposit Rates and 3 Months Fixed Deposit rates are drawn from the International Financial Statistics, IMF. The inflation rates used to generate the real interest rates are calculated by taking log-differences of a quarterly Consumer Price Indices (CPI).
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The Relationship between Real Interest Rates and Inflation

The Relationship between Real Interest Rates and Inflation

In this paper we use two simple descriptions of the long run link between real interest rates and inflation, and subsequently test their empirical performance, using similar techniques as employed in P-star modeling. In an empirical study, based on cointegration analysis, we show that the gap between the real and natural rate of interest does not determine inflation, as it is often postulated, but its growth rate. We find that this relationship describes reasonably well the long run influence of the interest rate gap on inflation. Simultaneously we calculate the average natural rate of interest.
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Saving and real interest rates in developing countries

Saving and real interest rates in developing countries

The role of real interest rates in saving behavior is more difficult to gauge. One problem--which is particularly important in Africa--is that financial markets remain thin and governments often set interest rates at nonmarket levels. Nevertheless, there is some evidence that "financial saving increased as a result of the increase in real interest rates associated with liberalization of financial markets in developing countries, both in Africa and elsewhere. For example, increases in saving rates have been associated with higher real interest rates in Indonesia and the Republic of Korea and, more recently, in
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How important are real interest rates for oil prices?

How important are real interest rates for oil prices?

The length of the sample is then varied. Impulse responses show that the real oil price has responded inversely to innovations in shorter-term U.S. real interest rates since at least 1988. This indicates that the relationship between these variables has not changed substantially over time. The relationship between longer-term U.S. real interest rates and the real oil price has changed. The sample must run through at least 2006 for the real oil price to fall in response to an innovation in longer-term U.S. rates. Variance decomposition also shows that the fraction of the forecast error variance of the real oil price accounted for by longer-term U.S. rates begins to increase in 1999, and reaches two percent in 2006 when the relationship becomes statistically significant. We also show that the ordering changes the responses, but the results are robust to the frequency of the data, lag length, time trends, filtering, and additional explanatory variables.
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The Relationship between Real Interest Rates and Inflation

The Relationship between Real Interest Rates and Inflation

This does not mean that estimating more precisely the natural rate of interest would not be helpful for monetary policy. We still do not know much about the behavior of this variable. Its determinants, among others the marginal product of capital, the productivity growth rate and the subjective discount rate of private agents are only hardly observable. With better estimates of the natural rate of interest, central banks could influence economic behavior with more precision. Disinflating countries would know, at what level to set real interest rates, after disinflation has been finished, without taking the risk of reflating the economy again.
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Real interest rates, money and government deficits

Real interest rates, money and government deficits

The upshot of this section is that at any given level of GNP, there are reasons to expect real inter- est rates to be higher if the money supply is smaller in comparison to demand, if th[r]

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The Real Exchange Rate, Real Interest Rates, and the Risk Premium

The Real Exchange Rate, Real Interest Rates, and the Risk Premium

Bacchetta and van Wincoop (2010) build a model based on this intuition. Much of the empirical literature that has documented the phenomenon of delayed overshooting has focused on the response of exchange rates to identified monetary policy shocks. 2 But in the original context, the story was meant to apply to any shock that leads to an increase in relative interest rates. Risk- based explanations of the interest parity puzzle have not confronted this literature’s finding that high interest rate currencies are strong currencies. Our empirical findings are consistent with Froot and Thaler’s hypothesis of delayed overshooting, but with one important modification. The empirical methods here allow us to uncover what the level of the real exchange rate would be if uncovered interest parity held, and to compare the actual real exchange rate with this notional level. We find the level of the real exchange rate is excessively sensitive to real interest differentials. That is, when a country’s real interest rate increases, its currency appreciates more than it would under uncovered interest parity. Then it continues to appreciate for a number of months, before slowly depreciating back to its long run level.
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Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates

Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates

As noted above, low and floating real interest and inflation rates have been observed since the Great Recession. Hence, the cause of the Great Recession needs to be examined prior to examining the mechanism of floating rates. Harashima (2016a) showed a cause of the Great Recession based on the concept a “Nash equilibrium of a Pareto inefficient path” (NEPIP). The concept of NEPIP reported by Harashima (2004a, 2009, 2012, 2016a, 2016d, 2017, 2018) enables us to explain a mechanism for why households rationally choose a Pareto inefficient path. Because of this choice, phenomena like the Great Recession and the Great Depression can be generated. An important feature of NEPIP is that it does not require a sudden huge technological regression and persisting rigidities in price adjustment processes to explain the Great Recession.
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A Brief Survey of Stochastic Properties of Real Interest Rates

A Brief Survey of Stochastic Properties of Real Interest Rates

Real interest rate is one of the most important economic variables. This variable plays a central role in decision-making process of households, firms and government, and main policy tool of many central banks. Stochastic properties of real interest rate is basic ingredient of several econometric models and has some important implications on basic assumptions of many important financial and macroeconomic models such as Consumption Based Asset Pricing Model, Fisher Hypothesis and some growth models. Because of its vital importance for the economy and economic-financial theories, time series properties of real interest rate have been investigated intensely. However, studies those investigate stochastic properties of real interest rates of developing countries is comparatively limited.
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Comparing equilibrium real interest rates: different approaches to measure Brazilian rates

Comparing equilibrium real interest rates: different approaches to measure Brazilian rates

Despite the difficulties involved in the precise determination of equilibrium real interest rates, it seems clear that nominal interest rates has been higher in Brazil than in similar emerging economies. This paper aims to shed light on the possible reasons for this feature of the Brazilian economy. We extend Miranda and Muinhos (2003) one-country study to a sample of 20 countries, using many methods to compare measures of the real interest: (i) extracting equilibrium interest rates from IS curves; (ii) extracting steady state interest rates from marginal product of capital; (iii) capturing relevant variables and the fixed effects having real interest rates as dependent variable in a panel for emerging countries; and (iv) extracting inflation expectation from the spread between fixed rate and inflation-indexed treasure notes.
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Real Interest Rates, Bubbles and Monetary Policy in the GCC countries

Real Interest Rates, Bubbles and Monetary Policy in the GCC countries

The IMF article IV consultation 2008 shows that the UAE had negative real interest rates persisted for years. Qatar too had a persistent negative real interest rate. Oman's rate became negative in 2007-2008. The other GCC countries have very low real interest rates. The GCC produce about 23 percent of the world's oil and controls 40 percent of the world's oil reserve. They probably feel safe from speculators because of their sizable foreign reserves. They also seem content with the fixed exchange rate regime and oblivious to housing price bubbles. The UAE and Qatar are similar to Hong Kong in many aspects.
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US Real Interest Rates and Default Risk in Emerging Economies

US Real Interest Rates and Default Risk in Emerging Economies

On the other hand, however, high real interest rates may reflect favourable external conditions for emerging markets, which reduce the risk of default. For example, real interest rates are usually high when world economic growth is strong and, concurrently, investors’ risk appetite is heightened on average, which makes investment in emerging countries all the more likely. Conversely, in times of world crises, interest rates are usually lowered to ease pressure on the financial sector.

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Real Exchange Rates and Real Interest Differentials: The Case of a Transitional Economy - Cambodia

Real Exchange Rates and Real Interest Differentials: The Case of a Transitional Economy - Cambodia

This study explores the long-run equilibrium relationship between real exchange rates of Riels/$US and real interest differentials in a transition economy, Cambodia. A battery of cointegration tests i.e. Engle-Granger tests, Johansen’s multivariate tests without and with unknown structural break(s), have been used for analysis. The monthly data between November 1994 and August 2009 supports this theoretical relationship between real exchange rates and real interest rate differentials (Cambodia’s deposit rates). This finding initially enhances fundamental knowledge of the so-called sticky-price model of exchange rate determination in Cambodia, in which the country’s real exchange rates can be predicted by the variation between domestic real interest rates (real deposit rates, r D ) and world real interest rates (r * ). By the same
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Comparing equilibrium real interest rates: different approaches to measure Brazilian rates *

Comparing equilibrium real interest rates: different approaches to measure Brazilian rates *

Despite the difficulties involved in the precise determination of equilibrium real interest rates, it seems clear that nominal interest rates has been higher in Brazil than in similar emerging economies. This paper aims to shed light on the possible reasons for this feature of the Brazilian economy. We extend Miranda and Muinhos (2003) one-country study to a sample of 20 countries, using many methods to compare measures of the real interest: (i) extracting equilibrium interest rates from IS curves; (ii) extracting steady state interest rates from marginal product of capital; (iii) capturing relevant variables and the fixed effects having real interest rates as dependent variable in a panel for emerging countries; and (iv) extracting inflation expectation from the spread between fixed rate and inflation-indexed treasure notes.
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Global Savings, Investment, and World Real Interest Rates

Global Savings, Investment, and World Real Interest Rates

Chart 6 presents a scatter plot of the world real interest rate against the realized world rate of investment/ savings. One possible interpretation of Chart 6 is that the net supply of savings had two distinct periods: the first, which one might consider to be before 1979 (highlighted by the savings-supply curve S A S A ), and a subsequent period after 1983 (illustrated by the curve S B S B ). During each of these two periods, it appears that the savings-supply equation was relatively stable, suggesting that variations in investment demand could be the dominant factor driving changes in the world interest rate. For example, in the late 1970s, there appears to have been an increase in the level of desired investment (a shift in the investment demand curve, not shown), which caused excess demand in the market, pushing real interest rates up along the savings-supply locus S A S A . Between 1979 and 1983, however, interest rates seem to have been pushed higher, primarily owing to a reduction in global savings plans, as illustrated by the shift of the savings-supply curve from S A S A to S B S B . In the period between 1983 and 1989, interest rates stayed high as investment demand remained strong. A final observation to be drawn from Chart 6 is that the low level of real interest rates that had appeared by 2004 seems more likely to be explained by a decade or more of weak investment demand than by an excess supply of savings. Indeed, relative to the early 1970s, when real interest rates were also low, the supply of global savings during and before 2004 appears to have fallen. Chart 6 naturally raises questions as to what caused these three signifi- cant shifts in desired savings and investment. With this in mind, the next section provides a conceptual overview of the key determinants of desired savings and investment.
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Monetary policy and short-term real rates of interest

Monetary policy and short-term real rates of interest

not statistically different before or after IV/1969 14 Changes in real balances have the same statistical effect on real interest rates across the sample period. Finally, it is appropriate to note that the estimated relationship implies apositive relationship between the volatility in teal money balances and the volatil- ity in real interest rates- If the frequency ofchange in real money balances Increases, the estimated rela- tionship implies an increase in the frequency of change in real interest rates. The evidence pre- sented here suggests that more stable real money growth, even over periods as short as a quarter, will produce a more stable pattern of real interest rate movements. 15
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Whither Real Interest Rates in India?

Whither Real Interest Rates in India?

In the case of advanced economies, which are more or less operating on the best attainable efficiency level, the real growth rate sets the limit for the real interest rate in the economy. It is interesting, therefore, to observe that the typical real interest rate on government paper in some of the advanced economies vary from 3 to 4 per cent, which is close to their growth rate of GDP. In the case of developing economies, the typical real interest rates are higher than those of the developed economies which is perhaps due to the higher rates of growth in these economies. It is possible that for a fast growing and high performing economy, the real rate of interest may in fact stay higher than the real growth rate, if the potential growth rate is higher than the actual growth rate and if expectation regarding the future growth rate is strong. However, a persistent high real interest rate which exceeds the real growth rate is not sustainable in the long run as this implies that the service cost of the capital stock exceeds the rate of return from capital. The real interest rate is significantly influenced by the efficiency of the financial system. A well functioning financial market helps reduce the cost of financial intermediation, and thereby brings down the spread between the interest rate on savings and that charged on investment. Not only that, even, an unsustainable fiscal policy, with a high burden of public debt, provides a downward stickiness to the real interest rate.
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Real interest rates, saving and investment

Real interest rates, saving and investment

Although higher (cyclically adjusted) budget de¯cits appear to be associated with lower long real rates according to the `trend in°ation' measure (contrary to our expec- tation), de¯cits have no discernible e®ect on short rates, nor on the `moving average' long rate measure. The insigni¯cance of the budget de¯cit is consistent with results in Barro and Sala-i-Martin (1990) and Barro (1992). Blanchard (1985) showed that the importance of de¯cits declines, the longer the horizon of households (and disappears when agents have in¯nite horizons). So our results are consistent with the behaviour of in¯nitely-lived agents. When agents are ¯nitely-lived, it is the expected sequence of de¯cits that matters for aggregate demand. In that case, current de¯cits matter only to the extent they proxy, or predict, (a weighted sum of) future de¯cits. Barro (1992) found current de¯cits to be very poor predictors of future de¯cits. Our results therefore should be interpreted as con¯rming that it is not helpful to look at current de¯cits in assessing the impact of ¯scal stance on real activity and interest rates | but this does not necessarily mean that expected future de¯cits do not matter.
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