Money, interest rates, and monetary policy

This dissertation contains two independent and self contained essays in monetary economics.; Chapter 1. "The New Keynesian Model and The Term Structure of Interest Rates". The first essay studies the ability of a standard New Keynesian model to reproduce the behavior of the term structure of interest rates for the U.S. economy. The model is consistent with important features of the data. The version of the expectations hypothesis embodied in the model does a good job in explaining the patterns of correlations between nominal interest rates of various maturities. Other aspects, such as the volatility of, both nominal and real, long-term interest rates as well as the correlations between nominal interest rates and output, are not appropriately captured by the model.; Chapter 2. "Should Monetary Policy Use Long-Term Rates?" The second essay studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first role allows long-term rates to enter the reaction function of the monetary authority. The second role considers the possibility of using long-term rates as instruments of policy. It is shown that in both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high.