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Using a Long-Term Interest Rate as the Monetary Policy Instrument

2004; Linguagem: Inglês

10.24148/wp2004-22

Bruce McGough, Glenn D. Rudebusch, John C. Williams,

Economic theories and models

Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find, when Taylor type policy rules are used to set the long rate in a standard New Keynesian model, indeterminacy--that is, multiple rational expectations equilibria--may often result. However, a policy rule with a long rate policy instrument that responds in a "forward-looking" fashion to inflation expectations can avoid the problem of indeterminacy.