The real interest rate and aggregate supply

Zvi Hercowitz*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper analyzes the effects of the anticipated real interest rate on aggregate supply variables, in a model where time-to-produce and variable capital utilization play a crucial role. The potential importance of the present mechanism for business cycle theory lies in its ability to generate positive co-movements of employment, capital utilization, labor productivity, output and investment. These variables are predicted to be affected negatively by the real interest rate. Reduced forms for output and employment are derived and tested with Canadian data, taking estimates of the real interest rate prevailing in the United States as the relevant exogenous price.

Original languageEnglish
Pages (from-to)121-145
Number of pages25
JournalJournal of Monetary Economics
Issue number2
StatePublished - Sep 1986


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