Using a long-term interest rate as the monetary policy instrument
Bruce McGough (),
Glenn Rudebusch () and
John Williams ()
No 2004-22, Working Paper Series from Federal Reserve Bank of San Francisco
Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find when Taylor-type policy rules are used to set the long rate in a standard New Keynesian model, indeterminacy--that is, multiple rational expectations equilibria--may often result. However, a policy rule with a long rate policy instrument that responds in a \"forward-looking\" fashion to inflation expectations can avoid the problem of indeterminacy.
Keywords: Monetary policy; Interest rates (search for similar items in EconPapers)
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Published in Journal of Monetary Economics, v. 52, no. 5 (July 2005) pp. 855-879
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