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Interest rate gaps in an uncertain global context: why “too” low (high) for “so” long?

Luca Agnello (), Vitor Castro and Ricardo Sousa
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Luca Agnello: University of Palermo

Empirical Economics, 2023, vol. 64, issue 2, No 1, 539-565

Abstract: Abstract We study the behaviour of real interest rate gaps—i.e. periods of real interest rates above (below) the natural interest rate—and link their length with a set of key observable determinants. Using quarterly data for 13 OECD countries over (close to) the last 60 years, we find that global risk-taking, CPI inflation, (un)conventional monetary policy, and income redistribution crucially shape the duration of both events. However, while labour-related supply-side factors appear to affect the length of positive interest rate gaps, the adoption of an inflation targeting regime and the current account balance seem to explain the duration of negative interest rate gaps. Our results suggest that the “normalisation” of the conduct of monetary policy is likely to be very gradual, and subject to spikes in uncertainty and financial markets’ volatility.

Keywords: Natural interest rate; Weibull model; Kalman filter; Global and domestic factors; Economic and monetary conditions and supply-side; Savings-glut; Inequality (search for similar items in EconPapers)
JEL-codes: C32 E43 E44 E52 O40 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-022-02265-x

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