Long-term debt pricing and monetary policy transmission

Arbeitspapier

Under rational expectations, monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure: Anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment, the expectations hypothesis of the yield curve need not hold, a situation called unanchored fi nancial market expectations. Whether or not financial market expectations are anchored, the private sector's imperfect knowledge mitigates the efficacy of optimal monetary policy. Under anchored expectations, slow adjustment of interest rate beliefs limits scope to adjust current interest rate policy in response to evolving macroeconomic conditions. Imperfect knowledge represents an additional distortion confronting policy, leading to greater inflation and output volatility relative to rational expectations. Under unanchored expectations, current interest rate policy is divorced from interest rate expectations. This permits aggressive adjustment in current interest rate policy to stabilize inflation and output. However, unanchored expectations are shown to raise significantly the probability of encountering the zero lower bound constraint on nominal interest rates. The longer the average maturity structure of the public debt, the more severe is the constraint.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 547

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Expectations; Speculations
• Subject: long debt ; optimal monetary policy ; expectations stabilization ; transmission of monetary policy ; expectations hypothesis of the yield curve ; Geldpolitik ; Zinsstruktur ; Rationale Erwartung ; Unvollkommener Markt ; Transmissionsmechanismus ; Entscheidung bei Unsicherheit ; Öffentliche Schulden ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Eusepi, Stefano ; Giannoni, Marc ; Preston, Bruce
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/60852
• Last update: 10.03.2025, 11:44 AM CET