As is widely recognized, real interest rates in the early 1980s were at
peaks not witnessed since the late 1920s. Less well perceived is the sharp
decline in real interest rates since 1984. By 1986-88, real interest rates
were back at their average levels of the previous quarter century. This paper
seeks to identify the underlying determinants of the major movements in real
six-month Treasury bill rates.
The rise in real interest rates between the middle 1970s and early 1980s,
not surprisingly, results from a variety of factors. First, rates were
unusually low in the middle 1970s owing to the first OPEC shock, which lowered
investment demand and increased world saving by transferring wealth from the
high-consuming developed countries to OPEC. Second. tight money, high
inflation, and hel ghtened nucl ear fear all contributed to real rates becoming
unusually high in the early 1980s. The eventual decline of OPEC surpluses
following the second OPEC shock prolonged the period of high real rates. The
decline in real rates to more normal levels in the 1986-88 period is also due
to multiple factors: lower inflation, declining marginal tax rates, and easy
monetary policy.
*Published:
Journal of Money, Credit and Banking, Vol. 24, No. 2, 1992 pp. 195-214
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