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Short and Long Interest Rate Targets

Working Paper 680 | Published August 31, 2010

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Authors

Isabel Correia

Pedro Teles Banco de Portugal, Catolica Lisbon SBE, and CEPR

Bernardino Adão

Short and Long Interest Rate Targets

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.