Journal Article

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

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;

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: New England Economic Review

Publication Date: 1995

Issue: Sep

Pages: 39-52