Why Are Target Interest Rate Changes So Persistent? / Olivier Coibion, Yuriy Gorodnichenko.

Format:

Book

Author/Creator:

Coibion, Olivier.

Contributor:

National Bureau of Economic Research.

Gorodnichenko, Yuriy.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16707.

NBER working paper series no. w16707

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

January 2011.