Political Regime Change and the Real Interest Rate

The effect of policy regime changes on real interest rates has important implications for financial and economic theory. However, there is little current evidence that such changes have any impact on the level of real interest rates. In this paper, we estimate both the number and location of structural breaks in the three-month U.S. real interest rate using a global optimization technique developed by Bai and Perron (1998). We compare the timing of large political changes to the dating of these structural breaks. We find that changes in party control of either a branch of Congress or the presidency are largely consistent with the timing of real rate shifts, while changes in the Federal Reserve chair are generally inconsistent with real rate regime shifts.