A BEJM Contributions article.

Abstract

Interest-rate smoothing is traditionally attributed to the gradual adjustment of monetary policy to shocks. Rudebusch (2002) argues that smoothing can also arise spuriously if an autocorrelated variable is incorrectly excluded from the estimated reaction function. This paper presents a model which discriminates between these two explanations using U.S. data. We find that both seem to matter, but that policy inertia appears to be less important than suggested by the existing literature. Further, the excluded variable is likely to reflect financial market conditions.

Submitted: September 30, 2003 · Accepted: February 23, 2004 · Published: March 25, 2004

Originally published in Contributions to Macroeconomics.

Recommended Citation

Gerlach-Kristen, Petra (2004) "Interest-Rate Smoothing: Monetary Policy Inertia or Unobserved Variables?," Contributions to Macroeconomics: Vol. 4 : Iss. 1, Article 3.
Available at: http://www.bepress.com/bejm/contributions/vol4/iss1/art3