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Short and Long Interest Rate Targets

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  • Bernardino Adão
  • Pedro Teles

Abstract

We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.

Suggested Citation

  • Bernardino Adão & Pedro Teles, 2010. "Short and Long Interest Rate Targets," Working Papers w201015, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201015
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    Cited by:

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    2. Li Lin & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2016. "On default and uniqueness of monetary equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 245-264, June.
    3. Udara Peiris, M & Polemarchakis, Herakles, 2015. "Quantitative Easing in an Open Economy: Prices, Exchange Rates and Risk Premia," Economic Research Papers 270000, University of Warwick - Department of Economics.
    4. Hoelle, Matthew, 2015. "On the Pareto efficiency of term structure targeting policies," Mathematical Social Sciences, Elsevier, vol. 77(C), pages 62-69.
    5. Michael Magill & Martine Quinzii, 2014. "Term structure and forward guidance as instruments of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(1), pages 1-32, May.
    6. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.
    7. McMahon, Michael & Peiris, Udara & Polemarchakis, Herakles, 2015. "Perils of quantitative easing," CRETA Online Discussion Paper Series 04, Centre for Research in Economic Theory and its Applications CRETA.
    8. McMahon, Michael & Peiris, M. Udara & Polemarchakis, Herakles, 2018. "Perils of unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 92-114.
    9. Bernardino Adao & Isabel Correia & Pedro Teles, 2011. "Unique Monetary Equilibria with Interest Rate Rules," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 432-442, July.
    10. Matthew Hoelle, 2018. "Stationary inflation and Pareto efficiency with incomplete markets and a large open economy," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 115-128, April.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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