Term Structure Rules for Monetary Policy

This paper studies two types of interest rate rules that involve long-term nominal interest rates in the context of a New Keynesian model. The first type considers the possibility of adding longer-term rates to the list of variables the central bank reacts to in setting its short-term rate. The second type considers Taylor-type rules that are expressed in terms of interest rates of different maturities, which are operationally equivalent to more complex rules expressed in terms of the short-term rate. It is shown that both types of rules can give rise to a unique rational expectations equilibrium in large regions of the policy-parameter space. The normative evaluation shows that under certain preferences of the monetary authority, policy rules of the second type produce better results than the standard Taylor-type rule.