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Using a long-term interest rate as the monetary policy instrument

2005; Elsevier BV; Volume: 52; Issue: 5 Linguagem: Inglês

10.1016/j.jmoneco.2005.07.011

1873-1295

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 by the central bank 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.