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

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

Abstract

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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  • 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.
    • Handle: RePEc:eee:moneco:v:52:y:2005:i:5:p:855-879
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