Structural change analysis in a real interest rate model

It is important to find the equilibrium level of real interest rate for it affects real and financial sector of economy. However, it is difficult to find the equilibrium level because like the most macroeconomic model the real interest model has parameter instability problem caused by structural change and it is supported by various theories and definitions. Hence, in order to cover these problems structural change detection model of real interest rate is developed to combine the real interest rate equilibrium model and the procedure to detect structural change points. Three equations are established to find various effects of other interest-related macroeconomic variables and from each equation, structural changes are found. Those structural change points are consistent with common expectation. Oil Crisis (December 1978), the starting point of Economic Stabilization Policy (January 1982), the starting point of capital liberalization (January 1988), the starting and finishing points of interest deregulation (January 1992 and December 1994). Foreign Exchange Crisis (December 1997) are detected as important points. From the equation of Fisher and real effect, real interest rate level is estimated as 4.09% (October 1998) and dependent on the underlying model, it is estimated as 0%–13.56% (October 1998), so it varies considerably. It is expected that this result is connected to the large scale simultaneous equations to detect the parameter instability in real time, so induces the flexible economic policies.