Monetary Policy at the Long-Term Margin: A Tobin-Kahn Framework

"Monetary Policy at the Long-Term Margin: A Tobin-Kahn Framework" published in in Aspects of Modern Monetary and Macroeconomic Policy, (eds) P. Arestis, E. Hein and E. Le Heron. London, UK: Palgrave/MacMillan


During the last years, there is an increasing interest among central bank policy makers in the ‘portfolio rebalancing effect’, which stems from the imperfect substitutability of financial assets, and which can be generated by central bank open market operations (Andres et al.2004). The discussion over the ‘portfolio rebalancing effect’ echoes the earlier-generation debate between the ‘bills-only’ and the ‘bills-bonds’ approach.

The ‘bills-only’ approach represents the ‘conventional’ position as it was shaped in the old debate that took place in the 1950s.According to the proponents of the ‘bills-only’ framework, the objectives of central bank policy should be achieved by open market operations in bills, but not in bonds. Thus, following this argument, the emphasis is on short-term treasury instruments rather than on longterm ones. Since the period in which this debate took place, the Federal Reserve Board applied almost always the ‘bills-only’ approach.The only exception was the application of the policy of ‘operationtwist’ in 1961.

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