Negative Real Interest Rates
40 Pages Posted: 7 Dec 2014 Last revised: 17 May 2017
Date Written: October 6, 2014
We develop the Cox, Ingersoll and Ross (1985b) “technological uncertainty variable” in terms of a skewed Student “t” probability density with mean reverting sample paths and time varying volatility so that it can accommodate negative real interest rates. The Fokker-Planck equation is then used to determine the conditional moments of the instantaneous real interest rate and the mean and variance of the accumulated real interest rate. We also determine the price of a pure discount bond when there is a non-trivial probability that real interest rates may go negative.
Keywords: Fokker-Planck equation, General equilibrium, Mean reversion, Real interest rate
JEL Classification: C61, C63, E43
Suggested Citation: Suggested Citation