Positive Real Interest Rates Research Articles

Interest Rate Policy in Central and Eastern Europe: The Influence of Monetary Overhangs and Weak Enterprise Discipline

Interest rate policy in the newly reforming Central and Eastern European countries has generally been geared toward establishing positive real interest rates and defending the exchange rate. The principal instrument for this task has been administrative increases in controlled interest rates. This paper examines the effect of these adjustments on inflation, the real interest rate and the exchange rate. It points out the risk that when financial discipline over enterprises is weak raising nominal interest rates may do little more than raise credit growth, the rate of depreciation and ultimately inflation. Simulations attempt to shed light on the importance of these linkages.

Endogenous cycles with uncertain lifespans in continuous time

Endogenous equilibrium business cycles are found in a Blanchard (1985) model modified to include endogenous labor supply. With low elasticities of substitution in production and consumption, cycles arise around stationary states with positive real interest rates.

Aspects of the Debate on Interest Rate Policies in Developing Countries

ABSTRACT A decade of thinking about the role of money and monetary policy in developing countries has seen financial liberalization emerge as the new conventional wisdom in the development literature. It has made the eradication of financial “repression”, through the pursuit of positive real interest rate policies, a key macroeconomic objective in a wide range of developing countries. After taking a brief look at the main theoretical arguments of financial liberalization, this paper questions the centrality of the high interest rate paradigm by addressing what appear as some of the most contentious issues in the debate over high interest rate policies, namely their impact on savings, investment and resource allocation, the problem of choosing the appropriate interest rate schedule, the contractionary effects of tight credit policies, as well as the impact of financial liberalization on credit market dualism.

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.

Interest Rates and Inflation in Argentina

This paper explores the nature of the relationship between interest rates and prices in Argentina since the end of 1971. The relevant data are shown in a table attached at the end of the paper. The evidence supports the view that, during this period, the successive movements of the Argentine inflation rate were directly explainable by such factors as changes in fiscal policy and wage policy. If movements of the nominal rates of itnerest contributed to the intensification or the decleration of inflation, it was not in the sense that higher interest rates increased costs and therefore add to upward prices presssures or the lower interest rates alleviated such preasures. Rather, when nominal interest rates rose, they rose less rapidly than prices and became increasingly negative in real terms, and, when they declined, they did so more slowly than prices and eventually became positive in real terms. By allowing increasingly negative real interest rates, the authorities promoted an intensification of credit demand which, at a time when the economy already was overheated, worsened inflation. By bringing about a restoration of positive real interest rates, they helped to reduce credit demand and thereby to alleviate inflationary pressures. Under a stabilization program intiated in April 1976, increase in interest rates at banks was used to help bring about a deceleration of inflation.