A long view of real rates

In light of the large and sustained rise in real interest ratesin the late 1970s and early 1980s, this paper reviews: (i) thetheoretical discussion on the determination of nominal and realinterest rates; (ii) the factors determining real interest rates;and (iii) problems of defining and measuring the real rate.We go on to examine the historical record of real interest ratesin France, Germany, the UK, and the USA since 1875. We findthat high real rates since 1980 seem to be a return to a long-runnorm, and it is the period from the Second World War to 1979that represents a more natural period in which to investigatean abrupt change of behaviour for real interest rates.