Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities
This paper discusses central banks’ use of the interest rate as the instrument of monetary policy, in light of a reconsideration of macroeconomic theory induced by the financial crisis and Great Recession. Three main guiding principles for the future conduct of interest rate policy are identified: beware real effects; beware positive feedbacks; and beware discontinuities. The paper also reflects on the use of policy targets as a “quasi-instrument” of stabilization policy.
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