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Money and Financial Markets

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We know that correlation does not necessarily imply causation. Nonetheless, the association between recessions and hikes in the federal funds rate suggests that increasing the funds rate can indeed cause recessions. But the sheer variety of shocks buffeting the economy implies that the correlation between the funds rate and output growth is quite small. Econometricians are left with the difficult task of isolating the effect of a funds rate increase on variables such as output and inflation.

Suggested citation: “Money and Financial Markets,” Federal Reserve Bank of Cleveland, Economic Trends, no. 06-12, pp. 06-07, 12.15.2006.

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