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The Fed's Preference for Policy Rate Smoothing: Overestimation Due to Misspecification? Author info | Abstract | Publisher info | Download info | Related research | Statistics Efrem Castelnuovo (University of Padua)
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The federal funds rate is featured by frequent, small changes in the same direction and infrequent reversals. How to replicate the observed smooth behavior of the federal funds rate with a small scale macroeconomic model? This paper compares the descriptive performance of an empirical fully backward looking model with that of an empirical new-Keynesian hybrid framework. It turns out that the Fed's monetary policy conduct can be very well described with a framework allowing for the presence of a small but positive fraction of forward looking agents in the IS curve. This element remarkably reduces the large interest rate smoothing weight otherwise needed to track the observed macroeconomic series.
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Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics .
Volume (Year): 6 (2006)
Issue (Month): 2 ()
Pages: 1416-1416
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Keywords: monetary policy authorities interest rate smoothing forward looking agents hybrid IS curve Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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