This paper discusses the definition and mechanics of central bank interest-rate smoothing under rational expectations. A tension arising between interest-rate smoothing and macroeconomic stabilization objectives induces non-trend-stationary B price level and money stock behavior. The paper thereby helps explain why such nominal nonstationarities are widely observed. Further implications are drawn for base drift, distribution of real returns on long-term, fixed-rate nominal debt, and operating characteristics of interest-rate pegs and policy instruments. See Working Paper 1987-03
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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number
86-04.
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