Interest rate gaps in an uncertain global context: why “too” low (high) for “so” long?

Agnello, Luca, Castro, Vítor and Sousa, Ricardo M. (2023) Interest rate gaps in an uncertain global context: why “too” low (high) for “so” long? Empirical Economics, 64 (2). 539 - 565. ISSN 0377-7332

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Abstract

We study the behaviour of real interest rate gaps—i.e. periods of real interest rates above (below) the natural interest rate—and link their length with a set of key observable determinants. Using quarterly data for 13 OECD countries over (close to) the last 60 years, we find that global risk-taking, CPI inflation, (un)conventional monetary policy, and income redistribution crucially shape the duration of both events. However, while labour-related supply-side factors appear to affect the length of positive interest rate gaps, the adoption of an inflation targeting regime and the current account balance seem to explain the duration of negative interest rate gaps. Our results suggest that the “normalisation” of the conduct of monetary policy is likely to be very gradual, and subject to spikes in uncertainty and financial markets’ volatility.

Item Type:	Article
Official URL:	https://www.springer.com/journal/181
Additional Information:	© 2022, The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Date Deposited:	20 Jul 2022 10:15
Last Modified:	12 Dec 2024 03:08
URI:	http://eprints.lse.ac.uk/id/eprint/115603

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