MODELING REAL INTEREST-RATES

In this paper we model real interest rates as a generalised mean rever ting Ornstein Uhlenbeck process. Empirical tests of the model using US and UK data for the period 1870-1975 shows that there exists signific ant mean reversion in both the US and UK for real interest rates, infl ation rates and nominal interest rates. We present evidence for some s tylised empirical facts which might be incorporated in models linking real interest rates, inflation and nominal interest rates.