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http://ssrn.com/abstract=338760
 
 

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Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates


John P. Huizinga


University of Chicago - Booth School of Business

Frederic S. Mishkin


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

October 1986

NBER Working Paper No. w1678

Abstract:     
A striking phenomenon of the early 1980s is the climb in real interest rates to levels unprecedented in the post-World War II period. In order to understand this phenomenon, this paper investigates the nature and timing of shifts in the real rate process to determine if the recent unusual behavior of real rates is associated with monetary policy regime changes. We find that not only are there significant shifts in the stochastic process of real interest rates in October 1979 and October 1982 when the Federal Reserve alters its behavior, but these dates are also found to be the most likely breakpoints in the real rate process. When we analyze another monetary policy regime change with many similarities to that of October 1979, the sharp rises in the discount rate in 1920, we also reach a similar conclusion; there is a striking correspondence between the monetary policy regime change and the shift in the real rate process. Other studies have examined competing explanations for the recent unusual behavior of real interest rates -- e.g.budget deficits or favorable changes in business taxation. Although these competing explanations have met with mixed success, our evidence lends substantial support to the view that monetary policy regime changes have been and continue to be an important source of shifts in the behavior of real interest rates.

Number of Pages in PDF File: 52

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Date posted: June 18, 2004  

Suggested Citation

Huizinga, John P. and Mishkin, Frederic S., Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates (October 1986). NBER Working Paper No. w1678. Available at SSRN: http://ssrn.com/abstract=338760

Contact Information

John Huizinga
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7272 (Phone)
773-702-2225 (Fax)
Frederic S. Mishkin (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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