Using a long-term interest rate as the monetary policy instrument [An article from: Journal of Monetary Economics]

This digital document is a journal article from Journal of Monetary Economics, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
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.