Equilibrium implications of interest rate smoothing

Diogo Duarte and Rodolfo Prieto

Quantitative Finance, 2020, vol. 20, issue 3, 409-423

Abstract: We introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve. We study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long- and short-term rates, and the persistence of monetary shocks. Our model supports the Federal Reserve's choice to incorporate financial data in their policy decisions and expand the monetary base to decrease the nominal interest rate spread at the cost of lower expected long-term growth.

Date: 2020
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DOI: 10.1080/14697688.2019.1645346

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