Real Effects of Nominal Interest Rates

The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of San Francisco, the Federal Reserve System, the Bank of Japan, or the National Bureau of Economic Research. John Leahy passed away while we were writing this paper. We miss his brilliance, his wisdom, and his perpetual good humor. We could not have written the paper without him; among his many other contributions, he developed the model in section 5. Josh Hausman worked on this paper in part while a visiting scholar at the Bank of Japan Institute for Monetary and Economic Studies in July and August 2025. He is grateful for the Bank of Japan’s hospitality. Gabe Chodorow-Reich, Masao Fukui, Christina Romer, David Romer, and Matthew Shapiro provided valuable advice. We received helpful comments from seminar participants at the Bank of Japan Institute for Monetary and Economic Studies, the (Japan) Seminar in Macroeconomics, and Williams College. The authors have no conflicts of interest or funding sources to disclose.