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Economic Quarterly

Summer 1995

Some Key Empirical Determinants of Short-Term Nominal Interest Rates

Yash P. Mehra

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 fiscal policy measures do not affect the short rate in the short run.

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