Monetary policy and the behavior of long-term real interest rates
AbstractA 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 InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 93-16.
Date of creation: 1993
Date of revision:
Other versions of this item:
- Jeff Fuhrer & George Moore, 1993. "Monetary policy and the behavior of long-term real interest rates," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Jeffrey C. Fuhrer, 1995. "Monetary policy and the behavior of long-term real interest rates," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 39-52.
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- Shu Wu, 2005.
"Monetary Policy and Long-term Interest Rates,"
WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS
200512, University of Kansas, Department of Economics, revised Apr 2005.
- Bennett T. McCallum, 2005.
"Monetary policy and the term structure of interest rates,"
Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
- Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
- Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 41-49.
- Jeffrey C. Fuhrer, 1994. "Optimal monetary policy in a model of overlapping price contracts," Working Papers 94-2, Federal Reserve Bank of Boston.
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