Supply Shocks and the Interest Rate

Dave Denslow and Mark Rush

Economic Inquiry, 1989, vol. 27, issue 3, 501-10

Abstract: The classic example of a temporary supply shock is a failed agricultural harvest. Theoretically, adverse temporary supply shocks are predicted to raise the ex ante real interest rate; that is, a below-normal harvest raises the interest rate. Apparently, however, no one has tested this conclusion using agriculture as the supply shock. This paper examines nineteenth-century French data and confirms the hypothesis that deviations from the "average" harvest have an inverse effect on the interest rate. It also finds that temporary fluctuations in government spending affect the interest rate: higher than normal government spending raises the interest rate. Copyright 1989 by Oxford University Press.

Date: 1989
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