Article ID Journal Published Year Pages File Type
5090713 Journal of Banking & Finance 2008 10 Pages PDF
Abstract

We find evidence of regime switching dynamics in the USA and the UK real interest rates over the period 1881-2003. For the UK, there is a regime in which the real interest rate displays a relatively stronger mean-reversion and a regime in which it displays a relatively weaker mean-reversion. The former regime is characterized by a relatively larger error in the estimation of the reversion parameter, and higher volatility. For the USA, the two regimes differ in volatility. The probability of transition from one regime to another is found to be significantly related to the inflation rate regime, and to the political regime. The results highlight the importance of regime switching in the dynamics of the real interest rate, as well as the role of inflation and political regimes in explaining this switching.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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