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Volume 55, Issue 7 -8


Determinants of Long-term Interest Rates in the Czech Republic (in Czech)

Holinka, Tomáš

Year: 2005   Volume: 55   Issue: 7 -8   Pages: 363-379

Abstract: The paper analyses the factors leading to the fall of long-term interest rates in the Czech Republic ? respectively, the long-term interest rate differential in the Czech Republic and the Eurozone ? between 1998 and 2003. The selection of factors is determined by the Fisher equation, UIP, PPP, expectation hypothesis and neoclassical growth theory. The paper suggests that falling long-term interest rates may have been affected by an expectation of lower short-term rates due to falling inflation expectations and inflation premiums. The decrease of CZK/EUR long-term rate differentials from 4 % to 0 % can approximately be explained by the one-third decrease of inflation expectations in the Czech Republic and by the 50% decrease of the relative inflation premium. In the long term, the effect of Czech National Bank monetary policy is dwindling vis-?-vis European Central Bank policy, i.e., euro interest rates. Another factor is the anticipated entry of the Czech Republic into the Economic Monetary Union. The real interest-rate differential has no effect.

JEL classification: E43, E44, O16, F43

Keywords: long-term interest rates; expectation hypothesis; UIP; PPP; growth theory; inflation expectations; premium


RePEc: http://ideas.repec.org/a/fau/fauart/v55y2005i7-8p363-379.html

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