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A Negative Equilibrium Interest Rate

Posted: 6 May 2003  

Moshe Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Avi Edry

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Abstract

The average after-tax real interest rate on U.S. T-bills and the average rate of return on long-term government bonds (LTGB) have been negative over the last 75 years. Is this negative rate an equilibrium phenomenon or simply an empirical fluke? We show that a negative equilibrium interest rate is possible and that the wealthier the nation is, the more negative the equilibrium interest rate can be. This phenomenon results from a positive inflation rate and taxation of nominal profits, and it cannot hold in a period of zero inflation or in a period of deflation. A positive demand for T-bills and for LTGB exists also in a portfolio framework, even when these two assets are characterized by a negative expected rate of return and other assets are yielding positive expected returns.

Keywords: Investment Theory: portfolio theory, Portfolio Management: asset allocation

Suggested Citation

Levy, Moshe and Levy, Haim and Edry, Avi, A Negative Equilibrium Interest Rate. Financial Analysts Journal, Vol. 59, No. 2, March/April 2003. Available at SSRN: https://ssrn.com/abstract=391040

Moshe Levy (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

Avi Edry

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Mount Scopus
Jerusalem, 91905
Israel

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