Short-term interest rates in the United States have been “too high” since October 1979 in the sense that both unconditional and conditional forecasts, based on an estimated vector autoregression model summarizing the prior experience, underpredict short-term interest rates during this period. Although a non-structural model cannot directly answer the question of why this has been so, comparisons of alternative conditional forecasts point to the post-October 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short-term interest rates. This ﬁnding is consistent with the authors’ macroeconomic model, that the high average level of interest rates has been due to a combination of slow growth of (nominal) money supply and continuing price inflation, which together have kept real balances small in relation to prevailing levels of economic activity.
Clarida, Richard H. and Friedman, Benjamin M., "The Behavior of U.S. Short-Term Interest Rates Since October 1979" (1984). Cowles Foundation Discussion Papers. 928.