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IS THE REAL INTEREST RATE REALLY UNSTABLE?
Author(s) -
Choi Seungmook
Publication year - 1994
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1994.tb00165.x
Subject(s) - inflation (cosmology) , unit root , interest rate , real interest rate , nominal interest rate , economics , econometrics , international fisher effect , ex ante , fisher hypothesis , macroeconomics , physics , theoretical physics
If nominal interest rates have a unit root, but inflation and inflation forecast errors do not, ex‐ante real interest rates are argued to have a unit root and are therefore nonstationary. I show that empirical tests for nonstationarity of real interest rates using such a deductive method can be misleading when the stationary inflation forecast errors are large relative to the variation of nominal interest rates.