Working Papers

August 2000, No. 00-9

The Behavior of the Real Rate of Interest Over the Business Cycle

Michael Dotsey and Brian Scholl

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.

Our Research Focus: Inflation and Monetary Policy

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