Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output

We present a structural model of the U.S. economy that combines our price-contracting specification with a term-structure relationship, an aggregate demand curve, and a monetary-policy reaction function. The model matches important features of postwar data well and provides a structural explanation...

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Bibliographic Details
Published in:The American economic review 1995-03, Vol.85 (1), p.219-239
Main Authors: Fuhrer, Jeffrey C., Moore, George R.
Format: Article
Language:English
Subjects:
Autocorrelation
Coefficients
Contract negotiations
Contracts
Correlation analysis
Demand curves
Economic conditions
Economic models
Inflation rates
Interest rates
Macroeconomics
Monetary policy
Output
Output gaps
Output rate
Prices
Rational expectations
Real output
Studies
U.S.A
Vector autoregression
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Summary:We present a structural model of the U.S. economy that combines our price-contracting specification with a term-structure relationship, an aggregate demand curve, and a monetary-policy reaction function. The model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short-term nominal rate of interest. We perform a battery of monetary-policy experiments which show that, as viewed through the lens of this model, monetary policy has struck a good balance recently among competing monetary-policy objectives.
ISSN:0002-8282
1944-7981