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Should Monetary Policy Use Long-Term Rates?

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  • Kulish Mariano

    ()

    (Reserve Bank of Australia)

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. 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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Find related papers by JEL classification:
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Cited by:

  1. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.
  2. Rajmund Mirdala, 2014. "Interest rates and structural shocks in European transition economies," Business and Economic Horizons (BEH), Prague Development Center, vol. 10(4), pages 305-319, November.
  3. Petra Gerlach-Kristen & Barbara Rudolf, 2010. "Macroeconomic and interest rate volatility under alternative monetary operating procedures," Working Papers 2010-12, Swiss National Bank.
  4. Kedan, Danielle & Stuart, Rebecca, 2014. "Operational targets and the yield curve: The euro area and Switzerland," Economic Letters 04/EL/14, Central Bank of Ireland.
  5. Choo, Han Gwang & Kurita, Takamitsu, 2011. "An empirical investigation of monetary interaction in the Korean economy," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 267-280, April.
  6. McGough, Bruce & Rudebusch, Glenn D. & Williams, John C., 2005. "Using a long-term interest rate as the monetary policy instrument," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 855-879, July.
  7. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
  8. Mariano Kulish, 2006. "Term Structure Rules for Monetary Policy," RBA Research Discussion Papers rdp2006-02, Reserve Bank of Australia.
  9. 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.
  10. Gerlach-Kristen, Petra & Rudolf, Barbara, 2010. "Financial shocks and the maturity of the monetary policy rate," Economics Letters, Elsevier, vol. 107(3), pages 333-337, June.

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