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Term Structure Rules for Monetary Policy

  • Mariano Kulish

    (Reserve Bank of Australia)

This paper studies two types of interest rate rules that involve long-term nominal interest rates in the context of a New Keynesian model. The first type considers the possibility of adding longer-term rates to the list of variables the central bank reacts to in setting its short-term rate. The second type considers Taylor-type rules that are expressed in terms of interest rates of different maturities, which are operationally equivalent to more complex rules expressed in terms of the short-term rate. It is shown that both types of rules can give rise to a unique rational expectations equilibrium in large regions of the policy-parameter space. The normative evaluation shows that under certain preferences of the monetary authority, policy rules of the second type produce better results than the standard Taylor-type rule.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2006-02.

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Date of creation: Apr 2006
Date of revision:
Handle: RePEc:rba:rbardp:rdp2006-02
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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  2. Kulish Mariano, 2007. "Should Monetary Policy Use Long-Term Rates?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-26, July.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics.
  5. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54.
  6. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  7. Peter N. Ireland, 2002. "Technology Shocks in the New Keynesian Model," Boston College Working Papers in Economics 536, Boston College Department of Economics.
  8. Andrew Stone & Troy Wheatley & Louise Wilkinson, 2005. "A Small Model of the Australian Macroeconomy: An Update," RBA Research Discussion Papers rdp2005-11, Reserve Bank of Australia.
  9. James A. Clouse & Dale W. Henderson & Athanasios Orphanides & David H. Small & Peter A. Tinsley, 2000. "Monetary policy when the nominal short-term interest rate is zero," Finance and Economics Discussion Series 2000-51, Board of Governors of the Federal Reserve System (U.S.).
  10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  11. Michael Gallmeyer & Burton Hollifield & Stanley E. Zin, 2005. "Taylor Rules, McCallum Rules and the Term Structure of Interest Rates," NBER Working Papers 11276, National Bureau of Economic Research, Inc.
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