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Why Are Real Interest Rates So High?

Author

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  • Zvi Bodie
  • Alex Kane
  • Robert L. McDonald

Abstract

This paper applies the Capital Asset Pricing Model to help explain the anomalous behavior of real interest rates during the last several years. Specifically,we are able to show that the increased volatility of bond prices since the change in Federal Reserve operating procedure in October 1979 has substantially increased the required real risk premium on long term bonds. We also consider and reject the possibility that increased risk alone accounts for the recent increase in the short-term real rate. Finally, we use the model to simulate the financial effects of a Federal debt maturity management operation.

Suggested Citation

  • Zvi Bodie & Alex Kane & Robert L. McDonald, 1983. "Why Are Real Interest Rates So High?," NBER Working Papers 1141, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1141
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    3. Walsh, Carl E., 1983. "Asset prices, asset stocks and rational expectations," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 337-349.
    4. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-926, December.
    5. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-227, May.
    6. Zvi Bodie & Alex Kane & Robert McDonald, 1985. "Inflation and the Role of Bonds in Investor Portfolios," NBER Chapters, in: Corporate Capital Structures in the United States, pages 167-196, National Bureau of Economic Research, Inc.
    7. V. Vance Roley, 1982. "The Effect of Federal Debt-Management Policy on Corporate Bond and Equity Yields," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 645-668.
    8. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    9. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
    10. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-799, September.
    11. Zvi Bodie, 1979. "Inflation Risk and Capital Market Equilibrium," NBER Working Papers 0373, National Bureau of Economic Research, Inc.
    12. Benjamin M. Friedman, 1981. "Debt Management Policy, Interest Rates, and Economic Activity," NBER Working Papers 0830, National Bureau of Economic Research, Inc.
    13. Irwin Friend & Joel Hasbrouck, "undated". "Effect of Inflation on the Profitability and Valuation of U.S. Corporations," Rodney L. White Center for Financial Research Working Papers 4-82, Wharton School Rodney L. White Center for Financial Research.
    14. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Citations

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    Cited by:

    1. Alex Kane & Leonard Rosenthal, 1985. "Efficient Inflation Forecasts: An International Comparison," NBER Working Papers 1542, National Bureau of Economic Research, Inc.
    2. Pindyck, Robert S, 1988. "Risk Aversion and Determinants of Stock Market Behavior," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 183-190, May.
    3. Jeffrey A. Frankel, 1983. "A Test of Portfolio Crowding-Out and Related Issues in Finance," NBER Working Papers 1205, National Bureau of Economic Research, Inc.
    4. Ray Chou & Robert F. Engle & Alex Kane, 1991. "Measuring Risk Aversion From Excess Returns on a Stock Index," NBER Working Papers 3643, National Bureau of Economic Research, Inc.
    5. Pinkdyck, Robert S., 1986. "Risk Aversion and Determinants of Stock Market Behavior," Foerder Institute for Economic Research Working Papers 275406, Tel-Aviv University > Foerder Institute for Economic Research.
    6. John A. Tatom, 1984. "Interest rate variability: its link to the variability of monetary growth and economic performance," Review, Federal Reserve Bank of St. Louis, vol. 66(Nov), pages 31-47.
    7. Koedijk, Kees & Kool, Clemens & Nissen, Francois, 1998. "Real interest rates and shifts in macroeconomic volatility," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 241-261, September.
    8. W. Jos Jansen, 1998. "The mean-variance model with capital controls and expectations formation. A test on German portfolio data," Applied Financial Economics, Taylor & Francis Journals, vol. 8(4), pages 333-346.
    9. Alex Kane & Young Ki Lee, 1983. "The Forecasting Ability of Money Market Fund Managers and its Economic Value," NBER Working Papers 1243, National Bureau of Economic Research, Inc.
    10. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 211-228.
    11. Bradford Cornell, 1986. "Inflation Measurement, Inflation Risk, And The Pricing Of Treasury Bills," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 9(3), pages 193-202, September.

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