A regression tree analysis of real interest rate regime changes

Abstract

This paper uses regression tree analysis to locate changes in the real interest rate process from the early 1950s to the early 1990s. We find important changes in the mean and variance of the process in 1972:Q4, 1980:Q1, and 1986:Q2. Removing the changing mean from the ex post real interest rate leaves a time series that is largely unpredictable - consistent with the view that it is a rational forecast error as predicted by the Fisher effect. This implies that the ex ante real interest rate is approximately a constant subject to infrequent but important changes.