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THE BEHAVIOR OF U.S. SHORT‐TERM INTEREST RATES SINCE OCTOBER 1979
Author(s) -
CLARIDA RICHARD H.,
FRIEDMAN BENJAMIN M.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03655.x
Subject(s) - interest rate , economics , inflation (cosmology) , term (time) , econometrics , vector autoregression , point (geometry) , yield curve , nominal interest rate , real interest rate , macroeconomics , mathematics , physics , geometry , quantum mechanics , theoretical physics
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, underpredict short‐term interest rates during this period. Although a nonstructural 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 interest rates. 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.