Household’s Preferences and Monetary Policy Inertia

Alessandro Flamini () and Andrea Fracasso

No 2009002, Working Papers from The University of Sheffield, Department of Economics

Abstract: The estimation of monetary policy rules suggests that the interest rates set by central banks move with a certain inertia. Although a number of hypotheses have been suggested to explain this phenomenon, its ultimate origin is unclear, thus delineating this issue as a modern "puzzle" in monetary economics. We show that household's preferences can play an important role in determining optimal interest rate inertia. Importantly, this can occur even when the central bank has negligible preferences for smoothing the interest rate.

Keywords: Optimal monetary policy; interest rate smoothing; household's preferences (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2009-02, Revised 2009-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Household's preferences and monetary policy inertia (2011)
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