Equilibrium Implications of Interest Rate Smoothing
48 Pages Posted: 17 Oct 2017 Last revised: 21 Jul 2018
Date Written: July 11, 2018
We introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve. We study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long- and short-term rates, the persistence of monetary shocks and equity volatility. Our model supports the Federal Reserve’s choice to incorporate financial data in their policy decisions and expand the monetary base to decrease the nominal interest rate spread at the cost of lower expected long-term growth.
Keywords: Dynamic monetary equilibrium, Long term growth, McCallum rule, Nominal spread, Quantitative easing
JEL Classification: D51, D53, E44, E58, G12
Suggested Citation: Suggested Citation