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

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  • McGough, Bruce
  • Rudebusch, Glenn D.
  • Williams, John C.

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 5 (July)
Pages: 855-879

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Handle: RePEc:eee:moneco:v:52:y:2005:i:5:p:855-879

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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Citations

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Cited by:
  1. Jones, Callum & Kulish, Mariano, 2013. "Long-term interest rates, risk premia and unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2547-2561.
  2. Bennett T. McCallum, 2011. "Should central banks raise their inflation targets? Some relevant issues," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 111-131.
  3. Woodford, Michael, 2005. "Comment on: "Using a long-term interest rate as the monetary policy instrument"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 881-887, July.
  4. Pedro Teles & Isabel Correia & Bernardino Adao, 2012. "Short and Long Interest Rate Targets," 2012 Meeting Papers 452, Society for Economic Dynamics.
  5. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers 2012/08, Bogazici University, Department of Economics.
  6. Petra Gerlach-Kristen & Barbara Rudolf, 2010. "Macroeconomic and interest rate volatility under alternative monetary operating procedures," Working Papers 2010-12, Swiss National Bank.
  7. Marzo, Massimiliano & Zagaglia, Paolo, 2011. "Equilibrium selection in a cashless economy with transaction frictions in the bond market," MPRA Paper 31680, University Library of Munich, Germany.
  8. Hess Chung & Jean-Philippe Laforte & David Reifschneider & John C. Williams, 2011. "Have we underestimated the likelihood and severity of zero lower bound events?," Working Paper Series 2011-01, Federal Reserve Bank of San Francisco.
  9. Sharon Kozicki & Peter Tinsley, 2005. "Term structure transmission of monetary policy," Research Working Paper RWP 05-06, Federal Reserve Bank of Kansas City.
  10. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 307-325.
  11. Gasteiger, Emanuel, 2011. "Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia," MPRA Paper 31004, University Library of Munich, Germany.

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