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I am examining how investor sentiment affects the probability of stock market crises. I am using methodology similar to this paper https://ideas.repec.org/p/dij/wpfarg/1110304.html.

One of the control variables in the model is the real interest rate. The authors calculate their measure of the real interest rate as "the money market rate, using the Consumer Price Index" (Table on page 25 of their paper).

I have CPI data for the countries that I am using in my study. However, I am not clear on how to transform Money Market Rate and CPI data into a measure of the real interest rate.

Thanks.

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Real rate = Money Market Rate - CPI

Approximately.

As I do want to be exact (thanks, @noob2): $(1+real)=\frac{1+MMR}{1+CPI}$

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    $\begingroup$ If you want it to be exact: $(1+real)=\frac{1+MMR}{1+CPI}$ $\endgroup$
    – noob2
    Jun 23 '16 at 13:08
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    $\begingroup$ He means CPI= the annual rate of increase of the CPI index. Not the index itself. $\endgroup$
    – dm63
    Jun 26 '16 at 11:02
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    $\begingroup$ Not to be too harsh to user44394, but this is why I voted to close the question as too basic. $\endgroup$
    – Owe Jessen
    Jun 27 '16 at 6:53

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