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  • General Discussion

Several participants argued that people do understand and act upon the idea of a real interest rate, even if they do not use that term. In particular, Martin Feldstein noted that people often use the term "inflation-adjusted interest rate" to mean the real interest rate.

Feldstein also stated, however, that the importance of real interest rates was slow to take hold at the Federal Reserve. As Alan Meltzer noted in his History of the Federal Reserve, decisionmakers at the central bank before the 1980s tended to think about monetary policy in terms of nominal interest rates. As a result, when the Federal Reserve responded to an increase in inflation by raising nominal rates, policymakers believed that policy had become more restrictive—even if nominal rates had not been increased as much as inflation, so that real rates remained below their starting values and policy had actually been eased. [End Page 133]

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Additional Information

ISSN
1533-4465
Print ISSN
0007-2303
Pages
p. 133
Launched on MUSE
2008-02-18
Open Access
No
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