On the Pareto efficiency of term structure targeting policies

• Analyzes welfare effects of term structure targeting policies.
• Central bank chooses a feasible monetary policy rule.
• Central bank policy determines prices and real bond payouts.
• Markets are complete.
• All feasible policy choices support Pareto efficiency.

In a stochastic economy, monetary policies that rebalance a central bank’s portfolio of short and long term government debt (term structure targeting) can have real effects. When the number of assets equals the number of states of uncertainty, however, this paper shows that the equilibrium allocation is Pareto efficient. Further, all policies with the same short-term interest rate targets support the same equilibrium allocation.