Can we explain unexpected fluctuations of long-term real interest rate?

TL;DR

This paper explores explanations for unexpected long-term real interest rate fluctuations using a modified IS-LM macroeconomic model and proposes policy cooperation to mitigate these variations.

Contribution

It introduces a modified IS-LM model to better understand interest rate fluctuations and suggests policy cooperation as a solution.

Findings

Modified IS-LM model explains interest rate fluctuations

Policy cooperation can reduce interest rate volatility

Illustrative example demonstrates model application

Abstract

In this paper, we present own point of view how the unexpected fluctuations of the long-term real interest rate can be explained. We describe a macroeconomic environment by the modification of the fundamental macroeconomic equilibrium model called the IS-LM model. Last but not least, we suggest a possible cooperation between the fiscal and monetary policy to reduce these fluctuations. Our modelling is demonstrated on an illustrative example.