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Short and Long Interest Rate Targets
E3 - Prices, Business Fluctuations, and Cycles
E4 - Money and Interest Rates
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
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.