Should Monetary Policy Use Long-Term Rates?

Mariano Kulish
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Mariano Kulish: Reserve Bank of Australia

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1

Abstract: This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. In both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. Long-term rates, however, turn out to be better instruments of monetary policy than short-term rates when the concern for inflation volatility is high.

Keywords: monetary policy rules; term structure of interest rates; long-term interest rates; monetary policy instrument (search for similar items in EconPapers)
JEL-codes: E43 E58 (search for similar items in EconPapers)
Date: 2007

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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:7:y:2007:i:1:n:15

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