COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 695 "The Behavior of United States Short-Term Interest Rates Since October 1979" Richard H. Clarida and Benjamin M. Friedman March 1986 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 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 interest rates. This finding is consistent with the authors’
macroeconomic 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. See CFP 596 |
