Volatility clustering in real interest rates: international evidence

Abstract

We investigate the volatility of real interest rates in 10 countries. An equilibrium model with financial frictions mimics the volatility of real rates and predicts a negative correlation of the conditional variance with the business cycle. Our contribution investigates the level and conditional volatility of real interest rates among a wider group of industrial countries and to consider the role of inflation targets in the process. We also consider the robustness of results to different DGPs for inflation expectations and the output gap. The introduction of inflation targets increases the level of real interest rates but decreases its conditional volatility.