Abstract
In a small open economy, it is common to regard the domestic interest rate as a function of the world rate plus a local risk premium. At the same lime. Irving Fisher's longstanding theory of the real interest rate emphasises the twin domestic forces of consumer thrift and producer productivity. This paper tests for a relationship between the Fisher variables and Australia's real interest rate. It is found that these two variables explain well the observed stationarity of the Australian real rate of interest since the early 1980s, indicating that thrift and productivity provide a robust theoretical framework for the macroeconomic factors that determine the risk premium.
Original language | English |
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Pages (from-to) | 151-171 |
Number of pages | 21 |
Journal | Economic Analysis and Policy |
Volume | 29 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1999 |