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Economic Quarterly

Summer 1996

Monetary Policy and Long-Term Interest Rates

Yash P. Mehra

Empirically, monetary policy affects bond rate components differently in the short run and the long. In the long run, it influences the bond rate mainly by altering the trend rate of inflation. In the short run, however, policy has significant effects on the real component of the bond rate. This effect has been especially pronounced since 1979. The bond rate rises anywhere from 26 to 50 basis points whenever the funds rate spread widens by one percentage point.

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