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SUPPLY SHOCKS AND THE INTEREST RATE
Author(s) -
DENSLOW DAVE,
RUSH MARK
Publication year - 1989
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1989.tb02018.x
Subject(s) - economics , interest rate , shock (circulatory) , ex ante , government (linguistics) , supply shock , government spending , monetary economics , agriculture , real interest rate , macroeconomics , monetary policy , market economy , medicine , ecology , linguistics , philosophy , biology , welfare
The classic example of a temporary supply shock is a failed agricultural harvest. Theoretically, adverse temporary supply shocks are predicted to raise the ex ante real interest rate; that is, a below‐normal harvest raises the interest rate. Apparently, however, no one has tested this conclusion using agriculture as the supply shock. This paper examines nineteenth century French data and confirms the hypothesis that deviations from the “average” harvest have an inverse effect on the interest rate. It also finds that temporary fluctuations in government spending affect the interest rate: higher than normal government spending raises the interest rate.