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Why do interest rates predict macro outcomes?: A unified theory of inflation, output, interest and policy

Arturo Estrella

No 9717, Research Paper from Federal Reserve Bank of New York

Abstract: Several articles published in the 1990s have identified empirical relationships between the term structure of real and nominal interest rates, on one hand, and future real output and inflation, on the other. Among these are Mishkin (1990a), Estrella and Hardouvelis (1991), Bernanke and Blinder (1992) and Fuhrer and Moore (1995). These articles demonstrate the existence of empirical predictive relationships, but the underlying economic reasons for the empirical regularities remain at least partly as puzzles. This paper presents a theoretical rational expectations model that shows how monetary policy is likely to be a key determinant of these empirical regularities.

Keywords: Forecasting; Gross domestic product; Inflation (Finance); Interest rates; Monetary policy (search for similar items in EconPapers)
Date: 1997
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