If real interest rate
differentials are stationary, then they should have mean-reverting qualities, for the whole sample or at least over long regimes.
Successful empirical evidence of the theory implies that the scope for international portfolio diversification is minimal and that the role of monetary policy as a stabilising tool is restricted to the degree that it influences the foreign real interest rate
lt;span style="mso-spacerun: yes;"> </span>The real interest rate
, therefore, is negative.
One major shortcoming of this paper is that the causality between the real interest rate
and inflation rate was not considered.
In this respect, if the hypothesis holds, then the real interest rate
should be stationary.
If the Fed sets rates so that the current real interest rate
is above the natural rate, policy is contractionary, and if below, expansionary.
The real interest rate
plays a central role in many important financial and macroeconomic models, including the consumption-based asset pricing model, neoclassical growth model, and models of the monetary transmission mechanism.
1) The two phenomena appear to be connected: elementary finance theory states that if the long-term real interest rate
is low, the rate of discount used to determine present values will also be low, and hence present values should be high.
The forward nominal interest rate can be seen as the combination of a forward real interest rate
and expected inflation.
The concept "neutral real interest rate
" is generally associated with the real interest rate
level, which implies that monetary policy is neither expansionary nor contractionary.
The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate
and the inflation risk premium.
Reduced investment demand and increased propensity to save operate in the direction of a lower equilibrium real interest rate