Have real interest rates really fallen that much in Spain?

Have real interest rates really fallen that much in Spain?

Serie: Documentos de Trabajo. 0704.

Autor: Roberto Blanco y Fernando Restoy.

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Have real interest rates really fallen that much in Spain? (527 KB)

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This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.

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