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dc.contributor.authorEusepi, Stefanoen_US
dc.contributor.authorGiannoni, Marcen_US
dc.contributor.authorPreston, Bruceen_US
dc.description.abstractUnder 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.en_US
dc.publisherFederal Reserve Bank of New York New York, NYen_US
dc.relation.ispartofseriesStaff Report, Federal Reserve Bank of New York 547en_US
dc.subject.keywordlong debten_US
dc.subject.keywordoptimal monetary policyen_US
dc.subject.keywordexpectations stabilizationen_US
dc.subject.keywordtransmission of monetary policyen_US
dc.subject.keywordexpectations hypothesis of the yield curveen_US
dc.subject.stwRationale Erwartungen_US
dc.subject.stwUnvollkommener Markten_US
dc.subject.stwEntscheidung bei Unsicherheiten_US
dc.subject.stwÖffentliche Schuldenen_US
dc.titleLong-term debt pricing and monetary policy transmissionen_US
dc.typeWorking Paperen_US
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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