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Yield Curve Control and Zero Interest Rate Policy in a Small Open Economy

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  • Callum Jones
  • Mariano Kulish

Abstract

At the zero lower bound, the expected duration of zero interest rate policy has two dimensions which are key to understanding the stance of monetary policy: (i) the actual duration communicated by the central bank or expected by the private sector, and (ii) the duration prescribed by the underlying monetary policy rule—the rule that is in place in normal times. In a small open economy, the duration prescribed by the underlying monetary policy rule depends in part on foreign economic conditions. including foreign monetary policy. A monetary policy tightening abroad depreciates the exchange rate, increases inflation and shortens the duration prescribed by the monetary policy rule. We argue that a monetary policy strategy like yield curve control that aims to pin down a given duration is risky when economic shocks can change the duration prescribed by the underlying monetary policy rule.

Suggested Citation

  • Callum Jones & Mariano Kulish, 2022. "Yield Curve Control and Zero Interest Rate Policy in a Small Open Economy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 55(3), pages 375-382, September.
    • Handle: RePEc:bla:ausecr:v:55:y:2022:i:3:p:375-382
    DOI: 10.1111/1467-8462.12484
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    References listed on IDEAS

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    1. Callum Jones & Mariano Kulish & Daniel M. Rees, 2022. "International spillovers of forward guidance shocks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(1), pages 131-160, January.
    2. John C. Williams, 2016. "Discussion of “Language after liftoff: Fed communication away from the zero lower bound”," Speech 164, Federal Reserve Bank of San Francisco.
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    Cited by:

    1. Prasanna Gai & Cameron Haworth, 2024. "Alternative Monetary Policy Commitments and the Yield Curve," The Economic Record, The Economic Society of Australia, vol. 100(329), pages 137-159, June.
    2. Sarantis Tsiaplias & Jiao Wang, 2023. "The Australian Economy in 2022–23: Inflation and Higher Interest Rates in a Post‐COVID‐19 World," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 56(1), pages 5-19, March.

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