On the Determination of Real Interest Rates in Europe

Klaas Knot

Empirical Economics, 1995, vol. 20, issue 3, 479-500

Abstract: In this paper a loanable funds model is estimated over the period 1959-90 for the determination of after-tax expected real interest rates using aggregated data for four European countries under the assumption that high capital mobility in Europe implies a common capital market. It is concluded that real interest rates in the European Community were mainly driven by movements in temporary income, expected inflation, lagged investment, money growth, and the oil price. Moreover, our aggregate model appears to be reasonably stable. Finally, individual country rates are shown to depend on the European rate as well as some country-specific variables, suggesting a limited degree of isolation from international financial markets for the countries concerned.

Date: 1995
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