Why Are Target Interest Rate Changes So Persistent?

Olivier Coibion and Yuriy Gorodnichenko

American Economic Journal: Macroeconomics, 2012, vol. 4, issue 4, 126-62

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 United States is controversial, with tests of competing hypotheses, such as interest-smoothing and persistent-shocks, 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 between competing explanations of policy inertia. The evidence strongly favors the interest-smoothing explanation and thus can help resolve a key puzzle in monetary economics. (JEL C53, E43, E47, E52, E58)

JEL-codes: C53 E43 E47 E52 E58 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/mac.4.4.126
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Citations: View citations in EconPapers (181)

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Working Paper: Why are target interest rate changes so persistent? (2011)
Working Paper: Why Are Target Interest Rate Changes So Persistent? (2011)
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