We study a simple, microfounded macroeconomic system in which the monetary authority employs a Taylor-type policy rule. We analyze situations in which the self-confirming equilibrium is unique and learnable according to Bullard and Mitra (2002). We explore the prospects for the use of ‘large...

This article examines the dynamic relationship between two key U.S. money market interest rates - the federal funds rate and the 3-month Treasury bill rate. Using daily data over the period 1974 to 1999, we find a long-run relationship between these two rates that is remarkably stable across...

Conventional wisdom posits that high interest rates stem capital flight and currency depreciation. Some have argued, however that the standard prescription exacerbates the problems. This paper set out a framework for evaluating the conditions under which an increase in domestic interest rates...

Inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before tax interest rate that influences fully taxed...

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve...

The real interest rate plays a central role in many important financial and macroeconomic models, including the consumption-based asset pricing model, neoclassical growth model, and models of the monetary transmission mechanism. We selectively survey the empirical literature that examines the...

This paper investigates the behavior of short-term real and nominal rates of interest by combining consumption-based and production-based models into a single general equilibrium framework. Based on the theoretical nonlinear relationships that link interest rates to both the marginal rates of...

This paper argues that the positive relationship between the level of prices and interest rates noted by Gibson arises, in part, because measured prices indexes, which are comprised primarily of the prices of short-lived consumption goods, and nominal interest rates are both driven in the same...