Using a long-term interest rate as the monetary policy instrument$

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. r 2005 Elsevier B.V. All rights reserved.