Discussion paper

DP1647 Real Interest Rates, Nominal Shocks, and Real Shocks

This paper uses a structural time-series analysis to analyse the properties of ex-ante real interest rates of the five major OECD economies in relation to temporary and permanent shocks to real output. Following Blanchard and Quah (1989) we refer to these innovations as ?nominal? and ?real? shocks respectively. The relationships of rates to these shocks appear to be qualitatively consistent with predictions of stochastic general equilibrium models of business cycles driven by both real and nominal disturbances. Real and nominal shocks originating in the United States are found to be the most important causes of persistence in ex-ante real interest rates, but of the two, only nominal shocks cause dynamic movements in rates that are coherent across all countries. Further results indicate that the rise in real interest rates experienced by these countries in the early 1980s was mainly due to nominal shocks in all five countries; real shocks played little or no role.


Driffill, J (1997), “DP1647 Real Interest Rates, Nominal Shocks, and Real Shocks”, CEPR Press Discussion Paper No. 1647. https://cepr.org/publications/dp1647