The role of structural factors in real interest rate behaviour: A cross-country study

Ariefianto, Moch. Doddy (Department of Accounting, BINUS Graduate Program-Master Accounting, Bina Nusantara University, Jl. Kyai H. Syahdan No.9, Jakarta, 11480)
Trinugroho, Irwan (Department of Management, Faculty of Economics and Business Universitas Sebelas Maret, Jl. Ir. Sutami 36A, Surakarta, 57126)

Jurnal Keuangan dan Perbankan
Vol 24, No 3 (2020): July 2020

Real Interest Rate (RIR) has a profound impact on the well-functioning of any economy hence a good understanding of its behavior is a key policy element. Using a Keynesian framework, we model and empirically test the relationship of RIR to selected structural variables namely inequality, dependency, financial depth, and institutional set up. We employ a panel dataset comprised of 115 countries with annual frequency from the period 2000 to 2018. Considering the structure of the dataset and possible endogeneity in the model; System GMM is used to estimate regressions parameters. We found that inequality and dependency do not have a significant influence on RIR. Financial development contributes to improving efficiency while institutional set up has a quadratic relationship with RIR. The better institution first increases RIR; after passing a certain cut off; further institution development would improve efficiency. RIR is found to be significantly procyclical. Further elaboration on the model; also revealed two different global RIR regimes with 2008 as threshold. There is also a significant counter cycle impact of financial development: negative interaction effect with the business cycle. JEL Classification: C23, E43, E32, O43 DOI: https://doi.org/10.26905/jkdp.v24i3.4777