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

52 Pages Posted: 18 Jun 2004 Last revised: 7 Aug 2010

See all articles by John P. Huizinga

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)

Date Written: August 1985

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.

Suggested Citation

Huizinga, John and Mishkin, Frederic S., Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates (August 1985). NBER Working Paper No. w1678. Available at SSRN: https://ssrn.com/abstract=338760

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

Register to save articles to
your library

Register

Paper statistics

Downloads
46
Abstract Views
1,101
PlumX Metrics