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

Jeffrey Fuhrer

New England Economic Review, 1995, issue Sep, 39-52

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.

Keywords: Interest rates; Monetary policy (search for similar items in EconPapers)
Date: 1995
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Related works:
Journal Article: Monetary policy and the behavior of long-term real interest rates (1993)
Working Paper: Monetary policy and the behavior of long-term real interest rates (1993)
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