Working Paper: CEPR ID: DP12833
Authors: Ricardo Reis
Abstract: Central banks have sometimes turned their attention to long-term interest rates as a target or as a diagnosis of policy. This paper describes two historical episodes when this happened—the US in 1942-51 and the UK in the 1960s—and uses a model of inflation dynamics to evaluate monetary policies that rely on going long. It concludes that these policies for the most part fail to keep inflation under control. A complementary methodological contribution is to re-state the classic problem of monetary policy through interest-rate rules in a continuous-time setting where shocks follow diffusions in order to integrate the endogenous determination of inflation and the term structure of interest rates.
Keywords: Taylor rule; yield curve; pegs; ceilings; affine models
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| targeting long-term interest rates (E43) | increased inflation volatility (E31) |
| targeting long-term interest rates (E43) | failures in controlling inflation (E64) |
| long-term interest rates shift monetary policy focus (E43) | destabilize inflation expectations (E31) |