Why Are Target Interest Rate Changes So Persistent?
- (pp. 126-62)
Abstract
While the degree of policy inertia in central banks' reaction functions is a central ingredient in theoretical and empirical monetary economics, the source of the observed policy inertia in the United States is controversial, with tests of competing hypotheses, such as interest-smoothing and persistent-shocks, being inconclusive. This paper employs real time data; nested specifications with flexible time series structures; narratives; interest rate forecasts of the Fed, financial markets, and professional forecasters; and instrumental variables to discriminate between competing explanations of policy inertia. The evidence strongly favors the interest-smoothing explanation and thus can help resolve a key puzzle in monetary economics. (JEL C53, E43, E47, E52, E58)Citation
Coibion, Olivier, and Yuriy Gorodnichenko. 2012. "Why Are Target Interest Rate Changes So Persistent?" American Economic Journal: Macroeconomics, 4 (4): 126-62. DOI: 10.1257/mac.4.4.126Additional Materials
JEL Classification
- C53 Forecasting and Prediction Methods; Simulation Methods
- E43 Interest Rates: Determination, Term Structure, and Effects
- E47 Money and Interest Rates: Forecasting and Simulation: Models and Applications
- E52 Monetary Policy
- E58 Central Banks and Their Policies
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