Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?

In this paper, we use the Bai and Perron (1998, 2001, 2003) methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries. We find extensive evidence of structural breaks in the mean real interest rate for all 13 countries. In an attempt to explain the breaks in international real interest rates, we also test for multiple structural breaks in the mean inflation rate for the 13 countries. Once again, we find extensive evidence of structural breaks in the mean inflation rate for all of the countries. Interestingly, the breaks in inflation rates and real interest rates often coincide, with increases (decreases) in the mean inflation rate as we move from one regime to the next typically associated with decreases (increases) in the mean real interest rate.