Inflation is the main determinant of the stochastic component of short-term nominal interest rates. The Federal Reserve … can, therefore, permanently lower short rates only by reducing inflation. In the short run, the behavior of nominal rates … is determined primarily by the outlook for inflation, by Fed policy, and by the state of the economy. Several customary …

This paper extends previous research on how monetary policy rates impact interest and inflation rates. We develop and … steady state policy rate elasticities of inflation and interest rates are derived. Employing U.S. rate series and state space … econometric methods, we estimate time-varying coefficients of the augmented system model. Policy rate elasticities of inflation …