School of Economics

2014 Discussion papers


School of Economics Discussion Paper 14/16


Is there any relationship between the rates of interest
and profit in the U.S. economy?


Ivan Mendieta-Muñoz
University of Kent


December 2014

Abstract:

This paper studies the empirical relationship between the Federal funds effective rate and the rate of profit or profit-to-capital ratio in the U.S. economy. The linkages between these two variables are studied: 1) at business-cycle frequencies using various filters and employing cross-correlation, regression and simulation analysis; and 2) using Vector Autoregressive models that unveil the dynamic interactions between the variables. The different empirical results reveal that positive shocks in the fed funds interest rate generate negative responses of the rate of profit, thus corroborating previous findings that show that a tight monetary policy is associated with lower aggregate profitability levels


JEL Classification: E22; E40; E43

Keywords: Fed funds effective real rate; rate of profit; U.S. economy; aggregate profitability


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