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


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; Interest rates; Gross domestic product; Inflation (Finance); Monetary policy;

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Provider: Federal Reserve Bank of New York

Part of Series: Research Paper

Publication Date: 1997

Number: 9717