Real output is strongly correlated with the short-term nominal rate of interest. However, standard models of aggregate demand suggest that real output should be correlated with an expected long-term real rate of interest. We argue that the observed output-nominal rate correlation is an artifact of monetary policy. The systematic behavior of monetary policy, in combination with sluggish inflation adjustment and a structural IS curve that relates output to the rationally expected long-term real rate of interest, has made the sample path of the long-term real rate look like the short-term nominal rate. Thus the statistical correlation between the nominal rate and output arises in the interaction of monetary policy with the rest of the macroeconomy; it is not a structural relationship that policy is free to exploit.
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)