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Should Monetary Policy use Long-term Rates?

  • Mariano Kulish

    (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. It is shown that 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. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 635.

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Length: 46 pages
Date of creation: 21 Nov 2005
Date of revision:
Handle: RePEc:boc:bocoec:635
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Web page: http://fmwww.bc.edu/EC/
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