On the characterisation of the world real interest rate

In this paper, the common trend technique is used to measure the approximate world real interest rate. The significance of this paper is, therefore, to visualise the current level of international economic integration by characterising the approximate world real interest rate, as a single common trend, taking full advantage of the fact that real interest rates in three large open economies have been moving together in the long run, sharing a common component even if their levels are distinctively different. This co-movement of real interest rates may be regarded as the long-run version of real interest parity, and the common trend is said to have a number of desirable properties as the world real interest rate. The structure of the paper is as follows: Section 2 measures the expected short-run real interest rates in Germany, Japan and the US; Section 3 extracts a single common trend in the three real interest rates as the world real interest rate; Section 4 discusses the desirable properties of this common trend as the world real interest rate; and finally Section 5 offers concluding remarks.