The Early History of the Real/Nominal Interest Rate Relationship
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Inflation, Income Taxes, and the Rate of Interest: a Theoretical Analysis
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Inflation, Tax Rules, and Capital Formation Volume Author/Editor: Martin Feldstein Volume Publisher: University of Chicago Press Volume ISBN: 0-226-24085-1 Volume URL: http://www.nber.org/books/feld83-1 Publication Date: 1983 Chapter Title: Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis Chapter Author: Martin Feldstein Chapter URL: http://www.nber.org/chapters/c11328 Chapter pages in book: (p. 28 - 43) Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis Income taxes are a central feature of economic life but not of the growth models that we use to study the long-run effects of monetary and fiscal policies. The taxes in current monetary growth models are lump sum transfers that alter disposable income but do not directly affect factor rewards or the cost of capital. In contrast, the actual personal and corporate income taxes do influence the cost of capital to firms and the net rate of return to savers. The existence of such taxes also in general changes the effect of inflation on the rate of interest and on the process of capital accumulation.1 The current paper presents a neoclassical monetary growth model in which the influence of such taxes can be studied. The model is then used in sections 3.2 and 3.3 to study the effect of inflation on the capital intensity of the economy. James Tobin's (1955, 1965) early result that inflation increases capital intensity appears as a possible special case. -
Philip R Lane: Determinants of the Real Interest Rate
SPEECH Determinants of the real interest rate Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the National Treasury Management Agency Dublin, 28 November 2019 Introduction It is a pleasure to address the Annual Investee and Business Leaders’ Dinner organised by the National Treasury Management Agency (NTMA).[1] I plan today to explore some of the factors determining the evolution of the real (that is, inflation-adjusted) interest rate over time. This is obviously relevant to the NTMA in its role as manager of Ireland’s national debt and also to its other business areas (Ireland Strategic Investment Fund; State Claims Agency; NewEra; National Development Finance Agency) and related entities (National Asset Management Agency; Strategic Banking Corporation of Ireland; Home Building Finance Ireland). More generally, the real interest rate is at the core of many financial valuation models, while simultaneously acting as a fundamental macroeconomic adjustment mechanism by reconciling desired savings and desired investment patterns. My primary focus today is on the real interest rate on sovereign bonds, which in turn is the baseline for pricing riskier bonds and equities through the addition of various risk premia. The real return on government bonds in advanced economies has undergone pronounced shifts over time. Chart 1 shows that, since the 1980s, the real return on sovereign debt has registered a steady decline towards levels that are low from a historical perspective. Looking at the 1970s, ex-post calculations of the real interest rate were also low during this period, since inflation turned out to be unexpectedly high. -
Macro-Economics of Balance-Sheet Problems and the Liquidity Trap
Contents Summary ........................................................................................................................................................................ 4 1 Introduction ..................................................................................................................................................... 7 2 The IS/MP–AD/AS model ........................................................................................................................ 9 2.1 The IS/MP model ............................................................................................................................................ 9 2.2 Aggregate demand: the AD-curve ........................................................................................................ 13 2.3 Aggregate supply: the AS-curve ............................................................................................................ 16 2.4 The AD/AS model ........................................................................................................................................ 17 3 Economic recovery after a demand shock with balance-sheet problems and at the zero lower bound .................................................................................................................................................. 18 3.1 A demand shock under normal conditions without balance-sheet problems ................... 18 3.2 A demand shock under normal conditions, with balance-sheet problems ......................... 19 3.3 -
On the Fisher Effect: a Review
Munich Personal RePEc Archive On The Fisher Effect: A Review Bosupeng, Mpho University of Botswana 2016 Online at https://mpra.ub.uni-muenchen.de/77916/ MPRA Paper No. 77916, posted 27 Mar 2017 14:07 UTC On The Fisher Effect: A Review Author Name: Mpho Bosupeng On The Fisher Effect: A Review Abstract The Fisher effect proposes that in the long run, nominal interest rates trend positively with inflation. In numerous studies the long run Fisher effect has been proved several times as compared to the short run Fisher effect phenomenon. The reason is in the long run, interest rates exhibit minimum volatility therefore resulting in the long run association. Even though the literature has been impressive in terms of validating the hypothesis, many central banks and policy makers have been lost in the lurch regarding the overall standpoint of the Fisher parity. This paper reviews the Fisher effect and examines factors that impinge on the hypothesis namely: inflation targeting, data set range and the regulation of the financial system. JEL: E43 KEYWORDS: Fisher effect; interest rates; inflation Introduction The Fisher effect is an equilibrium relation every central bank values and appreciates. The theory postulates that nominal interest rates rise together with inflation in the long run while real interest rates remain indifferent to this transaction following Fisher (1930). Many central banks securities such as certificates and bonds usually have fixed real interest rates. In practical terms, real interests are not always stagnant. In effect, the direct relationship between nominal interest rates and inflation changes over time which impinges on the Fisher effect. -
Testing the Fisher Hypothesis in the Presence of Structural Breaks and Adaptive Inflationary Expectations: Evidence from Nigeria
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Uyaebo, Stephen O. U. et al. Article Testing the Fisher hypothesis in the presence of structural breaks and adaptive inflationary expectations: Evidence from Nigeria CBN Journal of Applied Statistics Provided in Cooperation with: The Central Bank of Nigeria, Abuja Suggested Citation: Uyaebo, Stephen O. U. et al. (2016) : Testing the Fisher hypothesis in the presence of structural breaks and adaptive inflationary expectations: Evidence from Nigeria, CBN Journal of Applied Statistics, ISSN 2476-8472, The Central Bank of Nigeria, Abuja, Vol. 07, Iss. 1, pp. 333-358 This Version is available at: http://hdl.handle.net/10419/191679 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. -
On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation
BPEA Conference Drafts, March 7–8, 2019 On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation Łukasz Rachel, LSE and Bank of England Lawrence H. Summers, Harvard University Conflict of Interest Disclosure: Lukasz Rachel is a senior economist at the Bank of England and a PhD candidate at the London School of Economics. Lawrence Summers is the Charles W. Eliot Professor and President Emeritus at Harvard University. Beyond these affiliations, the authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the Bank of England, the London School of Economics, or Harvard University. On falling neutral real rates, fiscal policy, and the risk of secular stagnation∗ Łukasz Rachel Lawrence H. Summers LSE and Bank of England Harvard March 4, 2019 Abstract This paper demonstrates that neutral real interest rates would have declined by far more than what has been observed in the industrial world and would in all likelihood be significantly negative but for offsetting fiscal policies over the last generation. We start by arguing that neutral real interest rates are best estimated for the block of all industrial economies given capital mobility between them and relatively limited fluctuations in their collective current account. -
What Fiscal Policy Is Effective at Zero Interest Rates?
Federal Reserve Bank of New York Staff Reports What Fiscal Policy Is Effective at Zero Interest Rates? Gauti B. Eggertsson Staff Report no. 402 November 2009 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the author and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author. What Fiscal Policy Is Effective at Zero Interest Rates? Gauti B. Eggertsson Federal Reserve Bank of New York Staff Reports, no. 402 November 2009 JEL classification: E52 Abstract Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today. -
Notes for Econ202a: Consumption
Notes for Econ202A: Consumption Pierre-Olivier Gourinchas UC Berkeley Fall 2015 c Pierre-Olivier Gourinchas, 2015, ALL RIGHTS RESERVED. Disclaimer: These notes are riddled with inconsistencies, typos and omissions. Use at your own peril. Many thanks to Sergii Meleshchuk for spotting and removing many of them. Contents 1 Introduction 4 2 Consumption under Certainty 4 2.1 A Canonical Model . .4 2.2 Questioning the Assumptions . .5 2.3 The Intertemporal Budget Constraint . .6 2.4 Optimal Consumption-Saving under Certainty . .7 2.5 A Special case: when beta R=1 . .8 2.6 The Permanent Income Hypothesis . .8 2.7 Understanding Estimated Consumption Functions . .9 2.8 The LifeCycle Model under certainty . .9 2.9 Saving and Growth in the LifeCycle Model . 11 2.10 Interest Rate Elasticity of Saving . 12 2.10.1 The 2-period case with y1 = 0 .................... 14 2.10.2 The 2-period case with y1 6= 0 .................... 14 2.10.3 Savings and Interest Rates, a recap. 16 2.11 The LifeCycle Model under Certainty Again . 18 3 Consumption under Uncertainty: the Certainty Equivalent Model 19 3.1 The Canonical Model . 20 3.1.1 the set-up . 20 3.1.2 Recursive Representation . 21 3.1.3 Optimal Consumption and Euler Equation . 22 3.2 The Certainty Equivalent (CEQ) . 24 3.3 Tests of the Certainty Equivalent Model . 27 3.3.1 Testing the Euler Equation . 27 3.3.2 Allowing for time-variation in interest rate: the log-linearized Euler equation . 29 3.3.3 Campbell and Mankiw (1989) . 31 3.3.4 Household level data: Shea (1995), Parker (1999), Souleles (1999) and Hsieh (2003) . -
Permanent Income Hypothesis and the Cost of Adjustment Gerald F
Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1994 Permanent income hypothesis and the cost of adjustment Gerald F. Parise Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economic Theory Commons Recommended Citation Parise, Gerald F., "Permanent income hypothesis and the cost of adjustment " (1994). Retrospective Theses and Dissertations. 11304. https://lib.dr.iastate.edu/rtd/11304 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI filmg the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adverse^ affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left*hand comer and continuing from left to right in equal sections vtdth small overlap. -
Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gottschalk, Jan Working Paper Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions Kiel Working Paper, No. 1067 Provided in Cooperation with: Kiel Institute for the World Economy (IfW) Suggested Citation: Gottschalk, Jan (2001) : Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions, Kiel Working Paper, No. 1067, Kiel Institute of World Economics (IfW), Kiel This Version is available at: http://hdl.handle.net/10419/17891 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Kiel Institute of World Economics Duesternbrooker Weg 120 24105 Kiel (Germany) Kiel Working Paper No. -
Nber Working Paper Series Searching for Irving Fisher
NBER WORKING PAPER SERIES SEARCHING FOR IRVING FISHER Kris James Mitchener Marc D. Weidenmier Working Paper 15670 http://www.nber.org/papers/w15670 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 2010 We thank Michael Bordo, Richard Burdekin, Andy Rose, Eric Swanson, and participants at UC Berkeley, the San Francisco Fed, and the ASSA meetings for comments and suggestions. Mitchener acknowledges the generous financial support of the Hoover Institution while in residence as the W. Glenn Campbell and Rita Ricardo-Campbell National Fellow. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2010 by Kris James Mitchener and Marc D. Weidenmier. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Searching for Irving Fisher Kris James Mitchener and Marc D. Weidenmier NBER Working Paper No. 15670 January 2010 JEL No. E4,G1,N2 ABSTRACT There is a long-standing debate as to whether the Fisher effect operated during the classical gold standard period. We break new ground on this question by developing a market-based measure of general inflation expectations during the gold standard. Since the gold-silver price ratio was widely used to track inflation during the gold standard period, we are able to derive a measure of inflation expectations using the interest-rate differential between Austrian silver and gold perpetuity bonds with identical terms. -
Inflation Expectations, Real Interest Rate and Risk Premiums
INFLATION EXPECTATIONS,REAL INTEREST RATE AND RISK PREMIUMS— EVIDENCE FROM BOND MARKET AND CONSUMER SURVEY DATA Dong Fu Research Department Working Paper 0705 FEDERAL RESERVE BANK OF DALLAS In‡ation Expectations, Real Interest Rate and Risk Premiums— Evidence from Bond Market and Consumer Survey Data Dong Fuy June 2007 Abstract This paper extracts information on in‡ation expectations, the real interest rate, and various risk premiums by exploring the underlying common factors among the actual in‡ation, Univer- sity of Michigan consumer survey in‡ation forecast, yields on U.S. nominal Treasury bonds, and particularly, yields on Treasury In‡ation Protected Securities (TIPS). Our …ndings suggest that a signi…cant liquidity risk premium on TIPS exists, which leads to in‡ation expectations that are generally higher than the in‡ation compensation measure at the 10-year horizon. On the other hand, the estimated expected in‡ation is mostly lower than the consumer survey in‡ation forecast at the 12-month horizon. Survey participants slowly adjust their in‡ation forecasts in response to in‡ation changes. The nominal interest rate adjustment lags in‡ation move- ments too. Our model also edges out a parsimonious seasonal AR(2) time series model in the one-step-ahead forecast of in‡ation. JEL classi…cation: E43, G12, C32 Key words: In‡ation Expectations, Treasury In‡ation Protected Securities (TIPS), Survey In‡ation Forecast, Kalman Filter I would like to thank Nathan Balke for continuous guidance and encouragement. I also gratefully acknowledge comments and suggestions from Thomas Fomby, Esfandiar Maasoumi, Mark Wynne, Tao Wu, John Duca, Jahyeong Koo, Jonathan Wright, seminar participants at the Federal Reserve Bank of Dallas, O¢ ce of the Comptroller of the Currency and SERI, participants at the LAMES 2006 and the SEA 2006 annual meeting.