Interest Rate Variability and Output : Further Evidence

This paper provides a critique on “The Effects on Output of Money Growth and Interest Rate Volatility in the United States” by Paul Evans and offers alternative measures of interest rate variability as well as for money growth variability. These alternative measures were then used to conduct some of the tests reported by Evans. The results indicate that (1) it is not possible using Evan's model to disentangle whether only unanticipated interest rate variability matters, (2) Evans' results are sensitive to the measure of variability chosen, (3) one cannot reject the hypothesis that interest rate volatility did reduce output sharply and substantially between 1980-82 but interest rate volatility, in turn, rose because of an increase in the volatility of money growth and (4) in the model chosen by Evans to examine interest rate volatility effects, risk changes have dominant aggregate supply effects