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

  • Jeffrey C. Fuhrer

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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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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