An analysis of the real interest rate under regime shifts

We consider the time series behavior of the U.S. real interest rate from 1961 to 1986, using the methodology of Hamilton (1989), by allowing three possible regimes affecting both the mean and variance. The results suggest that the ex-post real interest rate is essentially random with means and variances that are different for the periods 1961-1973, 1973-1980 and 1980-1986. The inflation rate series also shows interesting shifts in both mean and variance. Series for the ex-ante real interest rate and expected inflation are constructed. Finally, we make clear how our results can explain some recent findings in the literature.