Sources of Variation in International Real Interest Rates

Allan Gregory and David G. Watt

Canadian Journal of Economics, 1995, vol. 28, issue s1, 120-140

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.

Date: 1995
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