Why are target interest rate changes so persistent?

Olivier Coibion and Yuriy Gorodnichenko

No 106, Working Papers from Department of Economics, College of William and Mary

Abstract: We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents persistent monetary policy shocks. Applying real-time data of the Federal Reserve’s macroeconomic forecasts, we document that the empirical evidence strongly favors the interestsmoothing explanation. This result obtains in nested specifications with higher order interest smoothing and persistent shocks, a feature missing in previous work. We also show that policy inertia is present in response to economic fluctuations not driven by exogenous monetary policy shocks. Finally, we argue that the predictability of future interest rates by Greenbook forecasts supports the policy inertia interpretation of historical monetary policy actions.

Keywords: Taylor rules; interest rate smoothing; monetary policy shocks. (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-01-23
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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http://economics.wm.edu/wp/cwm_wp106.pdf (application/pdf)

Related works:
Journal Article: Why Are Target Interest Rate Changes So Persistent? (2012)
Working Paper: Why Are Target Interest Rate Changes So Persistent? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cwm:wpaper:106

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