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Using a long-term interest rate as the monetary policy instrument

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Abstract

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.

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  • Bruce McGough & Glenn D. Rudebusch & John C. Williams, 2004. "Using a long-term interest rate as the monetary policy instrument," Working Paper Series 2004-22, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2004-22
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    Monetary policy; Interest rates;

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