Nonlinear dynamics of interest rate and inflation

Arbeitspapier

According to several empirical studies, US inflation and nominal interest rates, as well as the real interest rate, can be described as unit root processes.These results imply that nominal interest rates and expected inflation do not move one-for-one in the long run, which is not consistent with the theoretical models.In this paper we introduce a nonlinear bivariate mixture autoregressive model that seems to fit quarterly US data (1952 Q1 2000 Q2) reasonably well.It is found that the three-month treasury bill rate and inflation share a common nonlinear component that explains a large part of their persistence.The real interest rate is devoid of this component, indicating one-for-one movement of the nominal interest rate and inflation in the long run and thus stationarity of the real interest rate.Comparisons with a linear vector autoregressive model reveal that in policy analysis the consequences of neglecting nonlinearities can be substantial.

Object Details

• ISBN: 952-462-005-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Discussion Papers ; No. 21/2002

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Interest Rates: Determination, Term Structure, and Effects
• Subject: nonlinear models ; interest rate ; inflation ; cointegration analysis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lanne, Markku
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/211925
• Last update: 10.03.2025, 11:42 AM CET