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Monetary policy and the behavior of long-term real interest rates

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  • Jeffrey C. Fuhrer

Abstract

A time-honored description of the "monetary transmission channel" suggests that the Fed controls the federal funds rate, which affects the rates on longer-term credit market instruments, which affect the expected real (inflation-adjusted) rates on longer-term instruments, which affect real spending on interest-sensitive goods, which affects unemployment and inflation. And yet one key link in the chain, the expected real long-term interest rate, is not observable.> This article explores the link between the behavior of monetary policy and inferences about the behavior of the expected long-term real rate of interest. Analysis of this link reveals a sound empirical basis for the standard transmission channel. It also provides an explanation of the Bernanke-Blinder observation that short-term nominal rates are highly correlated with real output, an explanation that is fully consistent with the standard transmission channel.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1995)
Issue (Month): Sep ()
Pages: 39-52

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Handle: RePEc:fip:fedbne:y:1995:i:sep:p:39-52

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Keywords: Interest rates ; Monetary policy;

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Cited by:
  1. Shu Wu, 2008. "Monetary Policy And Long-Term Interest Rates," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 398-408, 07.
  2. Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 41-49.
  3. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  4. Jeffrey C. Fuhrer, 1994. "Optimal monetary policy in a model of overlapping price contracts," Working Papers, Federal Reserve Bank of Boston 94-2, Federal Reserve Bank of Boston.
  5. Ioannidis, Christos & Kontonikas, Alexandros, 2008. "The impact of monetary policy on stock prices," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(1), pages 33-53.

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