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Should Monetary Policy use Long-term Rates?

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Author Info
Mariano Kulish (Reserve Bank of Australia)

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Abstract

This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. It is shown that in both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 635.

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Length: 46 pages
Date of creation: 21 Nov 2005
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Handle: RePEc:boc:bocoec:635

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Related research
Keywords: interest rates; monetary policy;

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  16. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
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  19. Peter N. Ireland, 1996. "Long-term interest rates and inflation: a Fisherian approach," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-36. [Downloadable!]
  20. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis. [Downloadable!]
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  21. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54. [Downloadable!]
  22. Mehra, Yash P, 1997. "A Federal Funds Rate Equation," Economic Inquiry, Oxford University Press, vol. 35(3), pages 621-30, July.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mariano Kulish, 2006. "Term Structure Rules for Monetary Policy," RBA Research Discussion Papers rdp2006-02, Reserve Bank of Australia. [Downloadable!]
  2. Bruce McGough & Glenn D. Rudebusch & John C. Williams, 2004. "Using a long-term interest rate as the monetary policy instrument," Working Papers in Applied Economic Theory 2004-22, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
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