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Interest-Rate Smoothing: Monetary Policy Inertia or Unobserved Variables?
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Petra Gerlach-Kristen
Published/Copyright:
March 25, 2004
Abstract
Interest-rate smoothing is traditionally attributed to the gradual adjustment of monetary policy to shocks. Rudebusch (2002) argues that smoothing can also arise spuriously if an autocorrelated variable is incorrectly excluded from the estimated reaction function. This paper presents a model which discriminates between these two explanations using U.S. data. We find that both seem to matter, but that policy inertia appears to be less important than suggested by the existing literature. Further, the excluded variable is likely to reflect financial market conditions.
Published Online: 2004-03-25
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution
- What Does It Take to Explain Procyclical Productivity?
- Endogenous Distribution, Politics, and the Growth-Equity Tradeoff
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