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Macroeconomic and interest rate volatility under alternative monetary operating procedures

  • Petra Gerlach-Kristen
  • Barbara Rudolf

During the financial crisis of 2007/08 the level and volatility of interest rate spreads increased dramatically. This paper examines how the choice of the target interest rate for monetary policy affects the volatility of inflation, the output gap and the yield curve. We consider three monetary policy operating procedures with different target interest rates: two market rates with maturities of one and three months, respectively, and an essentially riskless one-month repo rate. The implementation tool is the one-month repo rate for all three operating procedures. In a highly stylised model, we find that using a money market rate as a target rate generally yields lower variability of the macroeconomic variables. This holds under discretion as well as under commitment both in times of financial calm or turmoil. Whether the one month or three month rate procedure performs best depends on the maturity of the specific rate that enters the IS curve.

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Paper provided by Swiss National Bank in its series Working Papers with number 2010-12.

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Length: 49 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-12
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  1. 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.
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  17. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
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