 The value of interest rate smoothing: how the private sector helps the Federal ReserveJeffery D. Amato and Thomas Laubach Economic Review, 1999, vol. 84, issue Q III, 47-64 Abstract: Most central banks conduct monetary policy by setting targets for overnight interest rates. During the 1990s, central banks have tended to move these interest rates in small steps without reversing direction quickly, a practice called interest rate smoothing. For example, the majority of Federal Reserve policy moves in the last decade and a half have come in a sequence of 25 basis point moves, in striking contrast to the early 1980s, when short-term interest rates fluctuated widely. In light of this historical contrast, it is natural to ask whether interest rate smoothing is a desirable way to conduct monetary policy.> Amato and Laubach argue that interest rate smoothing is beneficial because the private sector is forward-looking. The private sector bases its decisions on expectations of the future. Thus, a monetary policy move today will be more effective if it is expected to persist over time. By smoothing interest rates, the size of changes in interest rates required to reduce fluctuations in the economy can be smaller than would otherwise be necessary. Keywords: Monetary policy - United States; Monetary policy; Interest rates (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedker:y:1999:i:qiii:p:47-64:n:v.84no.3 Ordering information: This journal article can be ordered from Access Statistics for this article More articles in Economic Review from Federal Reserve Bank of Kansas City Contact information at EDIRC. |
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