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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.

Suggested Citation

  • 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.
    • Handle: RePEc:fip:fedbne:y:1995:i:sep:p:39-52
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    Cited by:

    1. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
    2. 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.
    3. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Fall), pages 1-21.
    4. Jeffrey C. Fuhrer & Brian F. Madigan, 1997. "Monetary Policy When Interest Rates Are Bounded At Zero," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 573-585, November.
    5. Shu Wu, 2008. "Monetary Policy And Long‐Term Interest Rates," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 398-408, July.
    6. Ioannidis, Christos & Kontonikas, Alexandros, 2008. "The impact of monetary policy on stock prices," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 33-53.
    7. 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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    Keywords

    Interest rates; Monetary policy;

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