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The Behavior of U.S. Short-Term Interest Rates Since October 1979

Richard H. Clarida and Benjamin M. Friedman
The Journal of Finance
Vol. 39, No. 3, Papers and Proceedings, Forty-Second Annual Meeting, American Finance Association, San Francisco, CA, December 28-30, 1983 (Jul., 1984), pp. 671-682
Published by: Wiley for the American Finance Association
DOI: 10.2307/2327925
Stable URL: http://www.jstor.org/stable/2327925
Page Count: 12
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The Behavior of U.S. Short-Term Interest Rates Since October 1979
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Abstract

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.

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