Journal Article

Real interest rates and macroeconomic activity

MP Taylor

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 15, issue 2, pages 95-113
Published in print June 1999 | ISSN: 0266-903X
Published online June 1999 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/15.2.95
Real interest rates and macroeconomic activity

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While standard discussions of the transmission mechanism of monetary policy tend to assume a strong and negative link between real interest rates and real macroeconomic activity, and this appears to some extent to be borne out by simulation of large-scale macroeconometric models, the empirical evidence suggests that the link between real interest rates and macroeconomic aggregates such as consumption and investment is, in fact, somewhat tenuous. The weak link between interest rates and aggregate consumption may be explained at a theoretical level, while the apparently weak link between interest rates and investment is more puzzling, although it may be related to neglect of issues such as uncertainty and the irreversibility of investment in empirical studies. Similarly, evidence on the link between real interest rates and economic growth is mixed, and this may be related to non-linearities in the relationship. The survey highlights the need for further research in this area.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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