Monetary Policy and Short-term Interest Rates: An Efficient Markets-Rational Expectations Approach



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    • University of Chicago. A more detailed version of this paper which contains additional results, Mishkin [12], is available as an NBER working paper. I thank James Pesando, Ed Burmeister, Ron Michener, Eugene Fama, and the participants in the Finance Workshop at the University of Chicago and the Money Workshops at the University of Chicago and the University of Virginia for their helpful comments. The National Science Foundation has provided research support. The usual disclaimer applies.


This paper is an application of efficient markets-rationael xpectations theory to analyze empirically the relationship of money supply growth and short-term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates.