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Why are Real Interest Rates so High?

42 Pages Posted: 5 Jul 2004 Last revised: 16 Aug 2010

Zvi Bodie

Boston University - Department of Finance & Economics

Alex Kane

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Robert L. McDonald

Northwestern University - Kellogg School of Management

Date Written: June 1983

Abstract

This paper applies the Capital Asset Pricing Model to help explain the anomalous behavior of real interest rates during the last several years. Specifically,we are able to show that the increased volatility of bond prices since the change in Federal Reserve operating procedure in October 1979 has substantially increased the required real risk premium on long term bonds. We also consider and reject the possibility that increased risk alone accounts for the recent increase in the short-term real rate. Finally, we use the model to simulate the financial effects of a Federal debt maturity management operation.

Suggested Citation

Bodie, Zvi and Kane, Alex and McDonald, Robert L., Why are Real Interest Rates so High? (June 1983). NBER Working Paper No. w1141. Available at SSRN: https://ssrn.com/abstract=305528

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Alex Kane

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

Robert L. McDonald

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

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