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Title: Short and Long Interest Rate Targets

Author(s): Bernardino Adão, Isabel Correia and Pedro Teles

Publication Date: July 2010

Keyword(s): long rates, Monetary policy, monetary policy instruments, multiplicity of equilibria, short rates, sticky prices and term structure

Programme Area(s): International Macroeconomics

Abstract: We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.

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Bibliographic Reference

Adão, B, Correia, I and Teles, P. 2010. 'Short and Long Interest Rate Targets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7935