Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10478470 | Journal of Monetary Economics | 2005 | 25 Pages |
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 by the central bank 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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Authors
Bruce McGough, Glenn D. Rudebusch, John C. Williams,