ABSTRACT
In a Humphrey-Hawkins testimony before Congress, Federal Reserve Chairman Greenspan suggested that real interest rates could come to play a larger role in the formulation of monetary policy. This chapter discusses what that role might be and describes what we know about the behavior of short-term real rates in the US It review suggests that while it is unlikely that real interest rates will provide information about how to conduct policy in the short run, they are likely to be useful in helping to avoid policy settings that are untenable in the long run. Short-term real interest rates show little evidence of systematic variation over the cycle, once these longer-run patterns are allowed for. Real interest rates are affected by a large number of factors, and it is difficult to know where the “equilibrium rate” would be at any point in time. The problem is made worse by the fact that the ex ante real rate cannot be observed directly.
