Correlations Between Real Interest Rates and Output in a Dynamic International Model: Evidence from G-7 Countries

Jahanara Zaman

No 1998/179, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the extent to which a dynamic international general equilibrium model can account for observed movements in real interest rates and interest rate differentials. Using data for Group of Seven, the study finds that measured real interest rates are countercyclical in a single country and that the contemporaneous cross-correlations between international real interest differentials and output growth spreads are negative. Predictions of the baseline model are, however, inconsistent with the data. Extending the benchmark model to include habit persistence in consumption improves the match between theory and data.

Keywords: WP; interest rate; open economy; Adjustment costs; Habit persistence; Interest rates; growth differential; interest differential; output differential; interest rate differential; real rate of interest; Real interest rates; Consumption; Production growth; General equilibrium models; interest rate movement; cyclical real interest rate; summary statistics of output differential (search for similar items in EconPapers)
Pages: 43
Date: 1998-12-01
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Citations: View citations in EconPapers (2)

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