Why Are Target Interest Rate Changes So Persistent?

Olivier Coibion and Yuriy Gorodnichenko

No 16707, NBER Working Papers from National Bureau of Economic Research, Inc

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 U.S. is controversial, with tests of competing hypotheses such as interest-smoothing and persistent-shocks theories 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 competing explanations of policy inertia. The presented evidence strongly favors the interest-smoothing explanation and thus can help resolve a key puzzle in monetary economics.

JEL-codes: E4 E5 E6 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published as Olivier Coibion & Yuriy Gorodnichenko, 2012. "Why Are Target Interest Rate Changes So Persistent?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 126-62, October.

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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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