Monetary policy and long-term real interest rates

Movements in real interest rates might provide timely and useful information about economic and financial conditions, and thus, might provide a useful guidepost for monetary policy makers. This involves addressing two sets of issues. The first set concerns how to define a benchmark with which to compare movements in real interest rates. The second set concerns the measurement of real interest rates. This chapter complements B. Trehan’s analysis by discussing these issues in terms of long-term interest rates. Chairman Greenspan defines the benchmark real interest rate as the level that, if sustained, would keep the economy at its productive potential over time. There are several to estimate real interest rates, corresponding to different estimates of expected inflation. One approach is to substitute actual, realized inflation rates for expected inflation. This measure is known as the ex post real interest rate. Another approach is to estimate expected inflation using survey data on inflation forecasts.