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

FRB of San Francisco Working Paper No. 2004-22

32 Pages Posted: 19 Jan 2005

See all articles by Bruce McGough

Bruce McGough

Oregon State University - Department of Economics

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

John C. Williams

Federal Reserve Bank of New York

Date Written: December 2004

Abstract

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.

Suggested Citation

McGough, Bruce and Rudebusch, Glenn D. and Williams, John C., Using a Long-Term Interest Rate as the Monetary Policy Instrument (December 2004). FRB of San Francisco Working Paper No. 2004-22, Available at SSRN: https://ssrn.com/abstract=650904 or http://dx.doi.org/10.2139/ssrn.650904

Bruce McGough (Contact Author)

Oregon State University - Department of Economics ( email )

303 Ballard Extension Hall
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Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

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John C. Williams

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States