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A Historical Perspective on Interest Rates in Denmark 1875-2003

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A Historical Perspective on Interest Rates in Denmark 1875-2003 A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Abildgren, Kim Working Paper A historical perspective on interest rates in Denmark 1875-2003 Danmarks Nationalbank Working Papers, No. 24 Provided in Cooperation with: Danmarks Nationalbank, Copenhagen Suggested Citation: Abildgren, Kim (2005) : A historical perspective on interest rates in Denmark 1875-2003, Danmarks Nationalbank Working Papers, No. 24, Danmarks Nationalbank, Copenhagen This Version is available at: http://hdl.handle.net/10419/82370 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 DANMARKS NATIONALBANK WORKING PAPERS 2005 • 24 Kim Abildgren Danmarks Nationalbank A historical perspective on interest rates in Denmark 1875-2003 February 2005 The Working Papers of Danmarks Nationalbank describe research and development, often still ongoing, as a contribution to the professional debate. The viewpoints and conclusions stated are the responsibility of the individual contributors, and do not necessarily reflect the views of Danmarks Nationalbank. As a general rule, Working Papers are not translated, but are available in the original language used by the contributor. Danmarks Nationalbank's Working Papers are published in PDF format at www.nationalbanken.dk. A free electronic subscription is also available at this Web site. The subscriber receives an e-mail notification whenever a new Working Paper is published. Please direct any enquiries to Danmarks Nationalbank, Information Desk, Havnegade 5, DK-1093 Copenhagen K Denmark Tel.: +45 33 63 70 00 (direct) or +45 33 63 63 63 Fax : +45 33 63 71 03 E-mail:[email protected] Text may be copied from this publication provided that Danmarks Nationalbank is specifically stated as the source. Changes to or misrepresentation of the content are not permitted. Nationalbankens Working Papers beskriver forsknings- og udviklingsarbejde, ofte af foreløbig karakter, med henblik på at bidrage til en faglig debat. 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ISSN (trykt/print) 1602-1185 ISSN (online) 1602-1193 A historical perspective on interest rates in Denmark 1875-20031 Kim Abildgren Danmarks Nationalbank Havnegade 5 DK-1093 Copenhagen K Denmark Phone:+45 33 63 63 63 E-mail: [email protected] February 2005 1 The author wishes to thank colleagues from Danmarks Nationalbank for useful comments on preliminary versions of this paper. The author alone is responsible for any remaining errors. A historical perspective on interest rates in Denmark 1875-2003 Abstract The paper paints a broad picture of the interest-rate development in Denmark since 1875. Three different short-term interest-rate series (the official discount rate, private banks’ average deposit rate, and the market rate of discount/money market rate) and two different long-term interest-rate series (government bond yield and yield on mortgage-credit bonds) are constructed. The “stylised facts” of the development in real interest rates and inflation expectations in Denmark are presented, and comparisons are made with the development in Germany, the UK, the USA, Norway and Sweden. Key words: History of interest rates; Danish interest rates. JEL Classification: E43; N23; N24. Resumé I papiret belyses renteudviklingen i Danmark siden 1875. Der konstrueres tre forskellige tidsrækker for den korte rente (den officielle diskontosats, pengeinstitutternes gennemsnitlige indlånsrente og den private vekseldiskonto/pengemarkedsrenten) og to forskellige tidsrækker for den lange rente (statsobligationsrenten og realkreditobligationsrenten). De “stiliserede fakta” for udviklingen i realrenter og inflationsforventningerne i Danmark præsenteres, og der sammenlignes med udviklingen i Tyskland, England, USA, Norge samt Sverige. 4 Table of contents 1. Introduction ....................................................................................................................... 6 2. Historical interest-rate data – some methodological notes ................................................ 6 3. Development of nominal interest rates and inflation in Denmark since 1875 – An overview ............................................................................................................................ 8 4. Real interest rates and financial market inflation expectations ....................................... 11 5. Summary of main findings .............................................................................................. 13 Appendix 1: Data..................................................................................................................... 14 Appendix 2: Data sources and calculation methods................................................................ 23 Tables and Charts .................................................................................................................... 32 5 1. Introduction The existence of financial markets and financial instruments facilitates an efficient allocation of savings from economic agents with a savings surplus to economic agents with savings deficits. Although legal regulations and other institutional factors to a certain and time- varying degree has influenced the allocation process, nominal and real interest rates has always played a crucial role for both real investments and financial portfolio decisions. This paper paints a broad picture of the interest-rate development in Denmark since the introduction of the krone as the Danish currency unit in 1875. Some “stylised facts” of the development in real interest rates and inflation expectations are presented, and comparisons are made with Germany, the UK, the USA, Norway and Sweden.2 The structure of the paper is as follows: Section 2 considers some issues related to comparability of interest rates across time and between countries and outlines the main characteristics of the data set on interest rates constructed in the paper. Section 3 presents the development in Danish interest rates and inflation during the different exchange-rate regimes that have prevailed since 1875. Finally, section 4 explores the development in different measures of real interest rates and looks at inflation expectations, while section 5 summarises some of the main findings. Most of the background data behind this paper is listed in appendix 1, while appendix 2 outlines the sources and compilation methods in details. 2. Historical interest-rate data – some methodological notes3 In general interest rates depend on the characteristics of the underlying financial assets from which the interest rates are derived. The level of interest rates thus depends on the maturity of the underlying asset and its cash-flow profile, the level of credit risks associated with the 2 For other long-span studies on the interest-rate development in Denmark, one may refer to Andersen, P. N. (ed.), Laanerenten i Danmark. En teoretisk og historisk undersøgelse med særligt henblik paa renteudviklingen i Danmark, Copenhagen: Nordisk Livsforsikrings-Aktieselskab og Nordisk Ulykkesforsikrings-Aktieselskab 1947; Christiansen, J. & Lystbæk, B., Afkast og risiko på aktier og obligationer 1915-1993, Finans/Invest, No. 3. 1994, 10-13; Møller, M. & Topp, N.-H., Er renten historisk lav? – eller har vi for mange samtidshistorikere?, Tidsskrift for Landøkonomi, 2003, 326-335; Nielsen, S. & Risager, O., Stock Return and Bond Yields in Denmark 1922- 1999, Scandinavian Economic History Review, Vol. 49(1), 2001, 63-82; Oldam, J. W., Danmarks høje renteniveau: En særlig tradition ?, Erhvervshistorisk årbog, 1963, 119-159; Parum, C., Historisk afkast af aktier og obligationer i
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