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

21 Pages Posted: 5 Jul 2004 Last revised: 26 Jun 2010

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 1984

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,under predict short-term interest rates during this period. Although a non-structural 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 interestrates. 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.

Suggested Citation

Clarida, Richard H. and Friedman, Benjamin M., The Behavior of U.S. Short-Term Interest Rates Since October 1979 (February 1984). NBER Working Paper No. w1273. Available at SSRN: https://ssrn.com/abstract=321321

Richard H. Clarida (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Eco ( email )

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Benjamin M. Friedman

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