Correlations Between Real Interest Rates and Output in a Dynamic International Model: Evidence from G-7 Countries
December 1, 1998
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Summary
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.
Subject: Consumption, Econometric analysis, Financial services, General equilibrium models, National accounts, Production, Production growth, Real interest rates, Technology
Keywords: Adjustment costs, Consumption, cyclical real interest rate, General equilibrium models, growth differential, Habit persistence, interest differential, interest rate, interest rate differential, interest rate movement, Interest rates, open economy, output differential, Production growth, Real interest rates, real rate of interest, summary statistics of output differential, WP
Pages:
43
Volume:
1998
DOI:
Issue:
179
Series:
Working Paper No. 1998/179
Stock No:
WPIEA1791998
ISBN:
9781451859003
ISSN:
1018-5941
