Real Interest Rate Effects Research Articles

Inventory Investment and the Real Interest Rate

The relationship between inventory investment and the real interest rate has been difficult to assess empirically. Recent work has proposed a linear-quadratic inventory model with time-varying discount factor to identify the effects of the real interest rate on inventory investment. The authors show that this framework does not separately identify the effects of real interest rate on inventory investment from variables that determine the expected marginal cost of production. In other words, the model does not deliver a testable restriction on the impact of interest rates on inventory investment. The authors highlight the consequences for both short- and long-run empirical analyses. They conclude that understanding the relationship between inventory investment and the real interest rate continues to be a theoretical and empirical challenge for macroeconomists. --

AN EMPIRICAL MODELLING ON SAVINGS BEHAVIOUR IN MALAYSIA

The purpose of this study is to re-investigate the savings behaviour in Malaysia through the cointegration and causality analyses. This study covered the annual data from 1970 to 2004. The results of bounds test confirmed a long run equilibrium relationship between savings and its determinants, namely real income, dependency ratio and real interest rates. The study found that the major causes of savings in Malaysia are real income and dependency ratio. On the other hand, the effect of real interest rate on savings in Malaysia is less. Therefore, monetary policy is not an effective macroeconomic policy instrument to encourage savings in Malaysia although savings and interest rates showed bilateral causality. In addition, savings Granger caused economic growth in Malaysia and the study found that households in Malaysia are very protective and the savings behaviour is driven by the precautionary savings.

Office Construction in Singapore and Hong Kong: Testing Real Option Implications

We advance the real-option-based empirical analysis of commercial real estate investment in three respects. First, we test several real option implications for real estate construction that have not been examined in the commercial real estate investment literature. In particular and in line with the predictions of real option models, we show that the effects of real interest rate and the expected demand growth on hurdle rent become more negative when the market volatility is greater. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than traditional indicators based on real estate prices and vacancy rates. Third, whereas the existing studies focus on the U.S. commercial real estate markets, we study two major office markets in Asia, namely Singapore and Hong Kong. We rely on the local stock market in the two city states to derive forward-looking measures of office demand growth expectations.

Factors Affecting Investment in Developing Countries: A Panel Data Study

This paper investigates the gross investment behavior in a panel of 97 developing countries spanning a period between 1973 and 2002. Fixed Effect Model is employed to analyze data. Variance Inflation Factor (VIF) test is conducted to ensure that the data are free from multicollinearity. Also, Granger Causality test is conducted to see if reverse causality exists. 2-Step 1 st Difference Generalized Method of Moments (GMM) dynamic panel estimator has been employed to offset unobserved heterogeneity and endogeneity of regressors. The results suggest that investment decisions still seem to be significantly affected by traditional determinants such as growth, domestic savings, trade openness etc. The variable aid appeared to potentially affect investment which calls for developing country's measures to ensure proper utilization of it. However, we failed to highlight the effect of real interest rate and uncertainty on investment attributing the former to macroeconomic volatility and latter to lack of data on corruption index.

Office Construction in Singapore and Hong Kong: Testing Real Option Implications

We advance the real-option-based empirical analysis of commercial real estate investment in three respects. First, we test several real option implications for real estate construction that have not been examined in the commercial real estate investment literature. In particular, we show that market volatility makes the effect of real interest rate and the expected demand growth on hurdle rent more negative, as the real option models predict. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than the traditional indicators based on real estate prices and vacancy rates. Third, whereas the existing studies focus on the U.S. commercial real estate markets, we study two major office markets in Asia, namely Singapore and Hong Kong. We are able to use the stock market prices in these two city states to generate forward-looking measures of office demand growth expectations and volatility.

Consumption and population age structure

In this paper, the effects on aggregate consumption of changes in the age distribution of the population are analysed empirically. Economic theories predict that age influences individuals’ saving and consumption behaviour. Despite this, age structure effects are rarely controlled for in empirical consumption functions. Our findings suggest that they should. By analysing Norwegian quarterly time series data, we find that changes in the age distribution of the population have significant and life-cycle-consistent effects on aggregate consumption. Furthermore, controlling for age structure effects stabilises the other parameters of the consumption function and reveals significant real interest rate effects.

Saving and Real Interest Rates in Brazil

This paper presents a critical analysis of governments' attempts to increase national and private savings by raising the real rate of return on financial assets. Using the Brazilian economy as a case study, the paper argues that successes in increasing the savings rate can be traced to the fiscal reforms that accompanied the process of financial system redesign that sought to free interest rates from administrative controls. Two types of econometric exercises are performed to offer evidence of the responsiveness of savings to changes in the expected real interest rate. The first one uses a standard saving function approach in evaluating the magnitude of the interest elasticity of savings. The second test addresses the issue by using the Euler equation technique and measuring the rate of intertemporal substitution in consumption. The results obtained in both sections point to a negligible effect of real interest rates on aggregate and private sector saving. These results have important implications for the design of stabilization and structural reform programs and they contradict the fundamental behavioral hypothesis underlying the savings policy advice most often given to developing economies by international organizations like the World Bank and the IMF.

Non-Traded Goods and the International Transmission of Fiscal Policy

.Abstract. This paper looks at the effect of non-traded goods on the international transmission of fiscal policy. Intertemporal movements in the price of non-traded goods affect real interest rates differentially between countries. The real interest rate effects of a fiscal expansion depend crucially upon both the composition of fiscal spending and the intertemporal elasticity of substitution. With a high intertemporal elasticity of substitution in consumption, a temporary fiscal expansion on non-traded goods will lead consumer real interest rates to move in opposite directions between countries.

Monetary disinflation in a simple two-country model

A two-country model with sluggish goods and labour markets, efficient financial markets, flexible exchange rates and perfect capital mobility is considered. The rational expectations dynamics are considerably simplified when the effects of real interest rates on investment are small. It can then be shown that simultaneous monetary disinflation has no real effects, whilst independent disinflation leads to output losses at home and gains abroad.

Expenditure, wealth and the rate of interest

Empirical studies into the determination of private sector expenditure have typically had considerable difficulty in discovering significant effects resulting from changes in private sector wealth, from interest rates or indeed from any other financial variables. This paper argues that, by adopting a particular, highly aggregative, approach it is possible, after all, to estimate powerful effects of this kind and, in so doing, suggests reasons why conventional research should yield more negative results. In addition, the discovery of significant wealth and real interest rate effects is shown to offer a potential explanation for the fall in the ‘velocity’ of financial wealth that has occurred in recent years.

The anticipated real interest rate, capital utilization and the cyclical pattern of real wages

This paper develops a channel through which increases in anticipated real interest rates can be ‘expansionary’ for current aggregate labor demand and current output supply. The key feature of the model is the introduction of a user cost of capital utilization which confronts the firm with the intertemporal problem of the optimal choices of capital utilization and depreciation. The resulting variation in capital utilization and capital services in response to fluctuations in the real rate of interest shifts the marginal product of labor and, thus, the demand for labor at the same time and in the same direction that Lucas-Rapping real interest rate effects operate on labor supply. The complete model places no a priori restrictions on the cyclical pattern of real wages, thus avoiding the countercyclical real wage prediction made by Keynes and various classical writers that is rejected by the data. Estimates of a labor demand schedule for the annual U.S. data reveal a significantly positive real interest rate effect.