An ordered probit analysis of monetary policy inertia

Bayar Omer ()
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Bayar Omer: Schroeder School of Business, University of Evansville, 1800 Lincoln Avenue Evansville, IN 47722 USA

The B.E. Journal of Macroeconomics, 2015, vol. 15, issue 2, 705-726

Abstract: The two leading explanations of the observed persistence in policy interest rate changes are monetary policy inertia and omitted serially correlated shocks. This paper addresses the persistence debate from the perspective of how to properly model policy rates. An ordered probit model is used to account for the discrete nature of interest rate adjustment, an aspect of policy absent in standard models. Ordered probit results show that the impact of inertia on interest rate setting is considerably smaller than indicated by standard models.

Keywords: federal funds rate; monetary policy inertia; ordered probit model (search for similar items in EconPapers)
JEL-codes: C25 E52 E58 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/bejm-2014-0158

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