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Should Monetary Policy Use Long-Term Rates?

  • Kulish Mariano

    ()

    (Reserve Bank of Australia)

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. 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. Long-term rates, however, turn out to be better instruments of monetary policy than short-term rates when the concern for inflation volatility is high.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (July)
Pages: 1-26

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:15
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