Floating-rate bonds and monetary policy effectiveness: insights from a DSGE model

Paulo Lins and Marcio Nakane

No 2019_08, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: In Brazil, there exists a government bond whose return is directly indexed to short-term interest rate set by the Central Bank. Some economists suggest that its existence decreases the effectiveness of monetary policy, mainly by clogging the wealth transmission channel. We introduce a floating-rate bond as a new financial asset in a canonical DSGE model and analyze its effects on the model dynamics. The new bond does not seem to change the dynamics of any variable, even in the presence of rule-of-thumb agents. We interpret these results as evidence against the argument that floating-rate bonds lead to a weaker monetary policy.

Keywords: Monetary Policy; Public Debt; Fiscal Policy; Letras Financeiras do Tesouro (search for similar items in EconPapers)
JEL-codes: E52 E63 H63 (search for similar items in EconPapers)
Date: 2019-02-13
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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