Is Real Interest Rate a Monetary Phenomenon in Advanced Economies? Time-Varying Evidence from Over 700 Years of Data

Vasilios Plakandaras, Rangan Gupta, Sayar Karmakar () and Mark Wohar ()
Additional contact information
Sayar Karmakar: Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL, 32601, USA
Mark Wohar: College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA

No 202245, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper we examine the effect of permanent inflation shocks on real interest rates, based on a structural Time-Varying Parameter Vector Autoregression (TVP-VAR) model that account for parameter instability. This is important since we use over 700 years of annual data that covers the entire economic history for France, Germany, Holland (the Netherlands), Italy, Japan, Spain, the United Kingdom (UK) and the United States (US), going as far back as 1310. Based on the responses of real interest rates to an inflation shock, the Fisherian hypothesis of a one-to-one movement of inflation to nominal interest rates can only be rejected episodically, in favour of a Mundell-Tobin effect of less than proportional increase in the nominal interest rate to an inflation shock. In other words, generally speaking, real interest rate in the long-run tends to be unaffected by inflation shocks, as derived from longest possible data samples of real interest rates and inflation for the advanced economies considered. Hence, the results in the existing literature based on post World War II samples, should be treated with caution due to the possibility of sample selection bias. Our findings, that real interest rates might not necessarily be a monetary phenomenon, have important policy implications in the current context of rising global inflation rates.

Keywords: Inflation; Real interest rate; TVP-VAR (search for similar items in EconPapers)
JEL-codes: C32 E31 E43 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2022-09
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-his and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202245

Access Statistics for this paper

More papers in Working Papers from University of Pretoria, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Rangan Gupta ().