Working Paper

Do productivity growth, budget deficits, and monetary policy actions affect real interest rates? evidence from macroeconomic announcement data

Abstract: Real-business-cycle models suggest that an increase in the rate of productivity growth increases the real rate of interest. But economic theory is ambiguous when it comes to the effect of government budget deficits on the real rate of interest. Similarly, little is known about the effect of monetary policy actions on real long-term interest rates. We investigate these questions empirically, using macroeconomic announcement data. We find that the real long-term rate of interest responds positively to surprises in labor productivity growth. However, we do not reject the hypothesis that the real long-term rate of interest does not respond to surprises in the size of the government*s budget deficit (or surplus). Finally, we find no support for the proposition that the Federal Reserve has information about its actions or the state of the real economy that is not in the pubic domain and, hence, priced in the real long-term interest rate.

Keywords: Interest rates; Monetary policy; Fiscal policy;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2004

Number: 2004-019