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Floating-rate bonds and monetary policy effectiveness: insights from a DSGE model

Author

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  • Paulo de Carvalho Lins
  • Marcio Issao Nakane

Abstract

In Brazil, there exists a government bond whose return is directly indexed to short-term interest rate set by the Central Bank. Some economists suggest that its existence decreases the effectiveness of monetary policy, mainly by clogging the wealth transmission channel. We introduce a floating-rate bond as a new financial asset in a canonical DSGE model and analyze its effects on the model dynamics. The new bond does not seem to change the dynamics of any variable, even in the presence of rule-of-thumb agents. We interpret these results as evidence against the argument that floating-rate bonds lead to a weaker monetary policy.

Suggested Citation

  • Paulo de Carvalho Lins & Marcio Issao Nakane, 2019. "Floating-rate bonds and monetary policy effectiveness: insights from a DSGE model," Working Papers, Department of Economics 2019_08, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2019wpecon08
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary Policy; Public Debt; Fiscal Policy; Letras Financeiras do Tesouro;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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