Using a Long-Term Interest Rate as the Monetary Policy Instrument


Bruce McGough

Glenn D. Rudebusch

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2004-22 | December 1, 2004

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.

Article Citation

McGough, Bruce, Glenn D. Rudebusch, and John C. Williams. 2004. “Using a Long-Term Interest Rate as the Monetary Policy Instrument,” Federal Reserve Bank of San Francisco Working Paper 2004-22. Available at

About the Author
John C. Williams served as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco from March 1, 2011 to June 17, 2018. Dr. Williams was previously the executive vice president and director of research for the San Francisco bank, which he joined in 2002. He began his career in 1994 as an […] Learn more about John C. Williams