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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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