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

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  • 1 January 2004
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      • Published in RePEc
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.
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