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Federal Reserve Bank of Richmond
Working Paper
Behavior of the real rate of interest over the business cycle
Michael Dotsey
Brian Scholl
Abstract

In this paper we document real rate behavior. We do this by looking across a wide variety of constructed real rate series. These series are obtained by using a number of different methodologies for estimating expected inflation, using several different price series, and looking over different time periods. The evidence suggests that over the entire sample period, real rate increases follow output increases and the real rate is positively correlated with contemporaneous output. These results, however, are sensitive to the price series used. That is, we find evidence of specification uncertainty. We also find that real rate behavior varies over different sample periods.


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Michael Dotsey & Brian Scholl, Behavior of the real rate of interest over the business cycle, Federal Reserve Bank of Richmond, Working Paper 00-09, 2000.
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Keywords: Interest rates ; Monetary policy ; Business cycles
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