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The Role of the Real Interest Rate in U.S. Macroeconomic History

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  • Weber Ernst Juerg

    (University of Western Australia)

Abstract

People who face adverse economic prospects save in order to maintain consumption. During wars and other periods of distress, the incentive to save was so strong that there would have been excess saving and a corresponding excess supply of commodities without a negative real interest rate. During the Great Depression, the interest rate mechanism failed to achieve macroeconomic equilibrium because the nominal interest rate could not fall further and deflation produced a positive real interest rate. The lesson from American economic history is that central banks should accept moderate inflation if an adverse political or economic shock causes consumer pessimism.

Suggested Citation

  • Weber Ernst Juerg, 2010. "The Role of the Real Interest Rate in U.S. Macroeconomic History," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-26, April.
    • Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:7
    DOI: 10.2202/1935-1690.1853
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    Cited by:

    1. Lee C. Spector & Courtenay C. Stone, 2010. "Suspicious Estimates of Ex Ante Real Interest Rates: Evidence of Macroeconomic Malpractice?," Working Papers 201010, Ball State University, Department of Economics, revised Oct 2010.

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    More about this item

    Keywords

    real interest rate; consumption growth; inflation; consumption Euler equation;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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