THE OUTPUT EULER EQUATION AND REAL INTEREST RATE REGIMES

Output Euler equations (OEE) for the US deliver slope estimates that are not significantly different from zero. This finding is counterintuitive as it implies a zero elasticity of intertemporal substitution (EIS) and aggregate demand movements that are nonresponsive to the short-term real interest rate. This paper shows that failure to account for regime changes in the dynamics of the real interest rate is responsible for this result. Based on a joint specification for the OEE and the real interest rate in an unobserved components model framework with Markov-switching parameters, the means, variances, and degrees of persistence of the real interest rate are different for the periods 1966–1980, 1980–1985, and 1985–2015. Once these regime changes are taken into account, the EIS estimate is 0.1 and no longer statistically insignificant. This finding is robust to alternative measures of the output gap as well as different specifications for the natural real interest rate.

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CAN RBC MODELS EXPLAIN BUSINESS CYCLES IN KOREA?

Macroeconomic Dynamics ◽

10.1017/s1365100515000619 ◽

2016 ◽

Vol 21 (3) ◽

pp. 599-623 ◽

Cited By ~ 1

Author(s):

Wooheon Rhee

Keyword(s):

Interest Rate ◽

Business Cycles ◽

Emerging Economies ◽

Real Interest Rate ◽

Error Term ◽

Strong Negative Correlation ◽

The Real ◽

Elasticity Of Intertemporal Substitution ◽

Korean Economy ◽

Rbc Models

I examine whether an RBC model can generate a higher volatility of consumption relative to output, a strong negative correlation between output and the trade balance, and a weak countercyclicality of the real interest rate, phenomena that have been observed in the business cycles of emerging economies, including Korea. From an RBC model with recursive utility, I show that it is not the degree of relative risk aversion, but the elasticity of intertemporal substitution (EIS), that governs the movements of the variables of the model in the log linearized environment. The Bayesian estimation results based on Korean data from the period 1987 to 2013 suggest that there are some elements of success in describing the Korean economy based on the simple RBC model both with the EIS larger than one and with an error term for the real interest rate equation. An EIS larger than one improves the performance of the simple RBC model mainly in the direction of raising the volatility of consumption relative to output. Simulation results show that the error term for the real interest rate process mostly reflects the endogenous channel of financial frictions where the domestic real interest rate depends negatively on the expected (transitory) productivity shock.

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Financial mechanisms of ensuring the development of business under high interest rates

VUZF Review ◽

10.38188/2534-9228.21.2.03 ◽

2021 ◽

Vol 6 (2) ◽

pp. 16-23

Author(s):

Vitaliy Shapran ◽

Igor Britchenko

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Real Interest Rate ◽

Stock Exchanges ◽

The Real ◽

High Interest ◽

Financial Conditions ◽

The Us ◽

Definition Of ◽

The Given

In the given article the problems of choice as for the types and forms of debt and share financing on the developing and “frontier markets” with high interest rates have been considered, the definition of what kind of interest rates can be viewed as high and under which circumstances nominal interest rate and in which ones – the real interest rate is important for business. Also, the classification of debt and sharing financing is given and the comparative analysis of such financing is made. Some close attention has been paid to the calculation of the real interest rate according to the inflation forecast. Recommendations concerning attracting of relatively cheap trade financing including international financial and credit organizations, development of operation factoring, financing from captive financial institutions of the exporters of the materials and equipment from the EU and the US have been grounded. The opportunity of relatively free of charge share financing through the mechanism of placing shares IPO/SPO is emphasized, exemplified by the results of placing shares on stock exchanges and their alternative platforms of issuing banks with businesses in Ukraine in 2005 – 2013. As a result, the conclusion concerning the necessity of thorough analysis of financial conditions on the developing and frontier markets before gaining such financing has been made. High interest rates within the average indicators even on the basis of prime rates do not necessarily mean absence of attractive conditions of financing.

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LESSONS FROM ARGENTINA’S CURRENCY BOARD SYSTEM FOR INDONESIA

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v5i3.315 ◽

2003 ◽

Vol 5 (3) ◽

pp. 122-157

Author(s):

Agus Fadjar Setiawan

Keyword(s):

Economic Growth ◽

Interest Rate ◽

Interest Rates ◽

Real Interest Rate ◽

Inflation Rate ◽

Nominal Exchange Rate ◽

Currency Board ◽

The Real ◽

The Us ◽

Board System

The purpose of this study is to attempt to draw lessons from Argentina’s Currency Board System (CBS) for Indonesia. Moreover, this study reviews Argentina’s economic performance before and after the implementation of the CBS, through an examination of some macroeconomic indicators namely real GDP growth, interest rates, money and inflation, as well as fiscal condition. The first three indicators are compared to the US, as the reserve-currency country, and Indonesia. The last indicator is compared to Indonesia only.In summary, the study found that after the adoption of the CBS the economic growth of Argentina substantially improved. The real interest rate tended to converge with the US interest rate, and the inflation rate that is linked to money growth was brought down to a low level close to the US inflation rate. However, this study also produced some more important findings. First, the long-run sustainability of Argentina’s economic growth with its CBS is questionable. Second, the real interest rate convergence was broken due to high default risk and deflationary expectations in Argentina. Third, low inflation later on turned to deflation as a consequence of the overvalued nominal exchange rate. Fourth, lack of sound fiscal policy and weak fiscal performance undermined the CBS regime. Finally, the study suggests that the absence of a lender of last resort is an institutional weakness of the CBS.

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