NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Are Real Interest Rates So High?

Zvi Bodie, Alex Kane, Robert L. McDonald

NBER Working Paper No. 1141 (Also Reprint No. r0498)
Issued in June 1983
NBER Program(s):   ME

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.

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Document Object Identifier (DOI): 10.3386/w1141

Published: Bodie, Zvi, Alex Kane and Robert L. McDonald. Why Haven't Nominal Rates Declined?" Financial Analysts Journal, Vol. 4 No. 2, (March-April 1984), pp. 16-27.

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