The Level and Volatility of Interest Rates in the United States: The Roles of Expected Inflation, Real Rates, and Taxes

John H. Makin, Vito Tanzi

NBER Working Paper No. 1167
Issued in July 1983
NBER Program(s):Public Economics

This paper attempts to demonstrate a need to expand the simple Fisherian view whereby changes in interest rates are explained largely by changes in expected inflation. It presents and tests a model of expected, after-tax real interest rate behavior which, together with a group of explanatory variables suggested by a structural model, takes full account of implications of a broad range of U.S. tax code provisions for behavior of interest rates. Determinants of interest rate volatility are also investigated.The model and results of empirical testing suggest:(1) why the measured impact on interest rates of changes in anticipated inflation has been below levels anticipated by many investigators; (2) how the measured impact on interest rates of explanatory variables is conditional on tax rates which may change over time; (3) larger than expected fiscal deficits have a moderate positive impact on interest rates (40 basis points per 100 billion annual rise for three-month Treasury bills) while lower than expected money growth may also raise interest rates (as iri the second quarter of 1981 when it did so by an estimated 24 basis points);(4) inflation uncertainty produces no significant impact on interest rates due to the econometric effect of including a measure of excess capacity; (5) an unexpected rise in money demand may be responsible for persistently higher interest rates during the first half of 1982 but during most of the 1960-82 period money supply shocks had a more powerful impact on interest rates.

download in pdf format
   (508 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1167

Published: Taxation, Inflation and Interest Rates, ed. Vito Tanyi International Monetary Fund Washington DC, 1984.

Users who downloaded this paper also downloaded* these:
Hartman and Makin w0906 Inflation Uncertainty and Interest Rates: Theory and Empirical Tests
Mishkin w3632 Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates
Sheshinski and Tanzi w3040 An Explanation of the Behavior of Personal Savings in the United States in Recent Years
Zarnowitz Consensus and Uncertainty in Economic Prediction
Reinhart and Reinhart w8535 What Hurts Most? G-3 Exchange Rate or Interest Rate Volatility
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us