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The Behavior of U.S. Short-Term Interest Rates Since October 1979

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  • Richard H. Clarida
  • Benjamin M. Friedman

Abstract

Short-term interest rates in the United States have been "too high" since October 1979 in the sense that both unconditional and conditional forecasts, based on an estimated vector autoregression model summarizing the prior experience,under predict short-term interest rates during this period. Although a non-structural model cannot directly answer the question of why this has been so,comparisons of alternative conditional forecasts point to the post-October 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short-term interestrates. This finding is consistent with the authors' earlier conclusion, based on analysis of a small structural macroeconometric model, that the high average level of interest rates has been due to a combination of slow growth of (nominal)money supply and continuing price inflation, which together have kept real balances small in relation to prevailing levels of economic activity.

Suggested Citation

  • Richard H. Clarida & Benjamin M. Friedman, 1984. "The Behavior of U.S. Short-Term Interest Rates Since October 1979," NBER Working Papers 1273, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1273
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    References listed on IDEAS

    as
    1. Richard H. Clarida & Diane Coyle, 1984. "Conditional Projection by Means of Kalman Filtering," Cowles Foundation Discussion Papers 702, Cowles Foundation for Research in Economics, Yale University.
    2. Richard H. Clarida & Benjamin M. Friedman, 1983. "Why Have Short-Term Interest Rates Been So High?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 553-586.
    3. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
    6. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 293-346.
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    1. Robert H. Rasche, 1993. "Monetary aggregates, monetary policy and economic activity," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 1-35.
    2. D’Amico, Stefania & Kim, Don H. & Wei, Min, 2018. "Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(1), pages 395-436, February.
    3. Jane K. Dokko & Brian M. Doyle & Skander J. van den Heuvel & Michael T. Kiley & Jinill Kim & Shane M. Sherlund & Jae W. Sim, 2009. "Monetary policy and the housing bubble," Finance and Economics Discussion Series 2009-49, Board of Governors of the Federal Reserve System (U.S.).
    4. Benjamin M. Friedman, 1986. "Money, Credit, and Interest Rates in the Business Cycle," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 395-458, National Bureau of Economic Research, Inc.
    5. Ching-Fan Chung & Mao-Wei Hung, 2000. "A general model for short-term interest rates," Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 111-121.
    6. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 815-828.
    7. Tsay, Wen-Jen, 2000. "Long memory story of the real interest rate," Economics Letters, Elsevier, vol. 67(3), pages 325-330, June.
    8. Kryzanowski, Lawrence & Xu, Kuan, 1997. "Long-term equilibria of yields on taxable and tax-exempt bonds," International Review of Economics & Finance, Elsevier, vol. 6(2), pages 119-143.
    9. James Payne & Bradley Ewing, 1997. "Evidence from lesser developed countries on the Fisher hypothesis: a cointegration analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 4(11), pages 683-687.

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