The Real Interest Rate: An Empirical Investigation

This paper is an empirical explorat ion of real interest rate movements in the United States over the last fifty years. It focuses on several questions which have repeatedly arisen in the literature. How valid is the hypothesis that the real rate of interest is constant? Does the real rate decline. with increases in expected inflation? Are cyclical movements in real variables correlated with real rate movements? How reliable is the Fisher effect where nominal interest rates reflect changes in expected inflation? Does monetary policy affect the real return to saving, with the resulting nonneutral effect on capital formation and productivity? What kind of variation in real interest rates have we experienced in the last fifty years? Have real rates turned negative in the 1970s as is commonly believed, and were they unusually high in the initial stages of the Great Depression?