Another way to phrase my question: why doesn't conventional monetary policy include manipulation of long-term interest rates?

This question might sound "weird" at first glance, but please hear me out.

  1. While the expectations hypothesis does not exactly hold, it is clear that through manipulating a series of short-term interest rates, central banks (CBs) are already impacting long-term interest rates. If so, why not directly influence it?

  2. One may argue that it is prudent for the CB to not have long-term engagements --- as their interventions are primarily about dealing with liquidity crises (at least in the past) --- so they should only deal with short-term lending. There are at least two arguments against that. First, as long as the long-term bond is actively traded, CBs can also get out of long-term bonds quickly. Second, CBs today have fairly sticky reserves, etc, so their engagement is already not really short-term anymore.

I am sure there are good arguments for why CBs don't deal with long-term interest rates. At least there should be good historical arguments (even if they don't apply today anymore).


1 Answer 1


The question doesn't sound weird. In fact, targeting of longer-term yields is not a new idea. It's commonly called yield curve control.

The US Fed implemented yield curve control during and after WWII (from 1942), in order to keep longer-term borrowing costs stable. And the Bank of Japan (BoJ) introduced the policy in 2016, while Australia did in 2020 (see, for example, here). It's also something that central banks elsewhere are considering. In particular, the US Fed was considering it at the beginning of 2020 (see here).

While, as you say, conventional monetary policy already affects the whole yield curve, it's difficult to control how exactly. So instead of using an interest rate tool, central banks need to exploit the relationship between price and yield. They do this by by buying (or selling bonds) of the targeted maturity. For example, they buy 15y bonds if they want to raise the corresponding yield. Lowering the yield may not easily feasible, if the CB doesn't have a good stock of bonds with maturities similar to the target maturity.

The active purchasing or selling of bonds - quantitative easing or tightening - is (at least at the moment) still considered unconventional monetary policy. So, until QE is considered conventional, if it ever is, yield curve control is unconventional policy by definition.


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