Equilibrium Implications of Interest Rate Smoothing

48 Pages Posted: 17 Oct 2017 Last revised: 21 Jul 2018

See all articles by Diogo Duarte

Diogo Duarte

Florida International University (FIU) - Department of Finance

Rodolfo Prieto

INSEAD

Date Written: July 11, 2018

Abstract

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

Duarte, Diogo and Prieto, Rodolfo, Equilibrium Implications of Interest Rate Smoothing (July 11, 2018). Available at SSRN: https://ssrn.com/abstract=3053918 or http://dx.doi.org/10.2139/ssrn.3053918

Diogo Duarte (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Rodolfo Prieto

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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