Interest rate effects in modern industrial economies

This research attempted to ascertain the relationships between nominal interest rates, nominal spending, real output, the price level and the money supply. The essence of the study constitutes chapters three, four and five which follow a review of the literature in chapter two. In chapter three it was found that nominal interest rates are correlated with real output but not with nominal spending. A vector autoregression (VAR) was used to empirically test these relationships. In chapter four the cointegration technique was utilized to ascertain whether nominal interest rates and nominal spending or nominal interest rates and real output have a long term structural relationship. It was found that nominal interest rates are not cointegrated with either nominal spending or real output. In chapter five the cointegration technique was utilized to test two opposing theories of price level determination. It was found that the M2 measure of the money supply and the GNP deflator formed a cointegrated series. It was also found that nominal interest rates, nominal wages, and the GNP deflator form a cointegrated series. Both theories thus received empirical support. It was concluded that raising interest rates reduce output for a short time but have no long term impact.