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The role of ad hoc factors in policy rate settings

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  • Podpiera, Jirí

Abstract

Policymakers do not always follow a simple rule for setting policy interest rates for various reasons. Thus their behavior can be represented by a standard Taylor type policy rule amended with an additional variable representing an ad hoc factor. Consequently, ignoring the presence of the ad hoc factor causes bias in conventional policy rule estimators. I contrast the unbiased estimates of a procedure that accounts for the ad hoc factors and the bias of least squares on a unique data set of an unconditional inflation targeting episode.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 5 (September)
Pages: 1003-1010

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:1003-1010

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Web page: http://www.elsevier.com/locate/inca/30411

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  1. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Paper Series 2005-19, Federal Reserve Bank of San Francisco.
  2. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  3. Kevin J. Lansing, 2002. "Real-time estimation of trend output and the illusion of interest rate smoothing," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
  4. Hakkio, Craig S. & Pearce, Douglas K., 1992. "Discount rate policy under alternative operating procedures: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 1(1), pages 55-72.
  5. Podpiera, Jirí, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 0771, European Central Bank.
  6. S Derlind, Paul & S Derstr M, Ulf & Vredin, Anders, 2005. "Dynamic Taylor Rules And The Predictability Of Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 9(03), pages 412-428, June.
  7. Choi, Woon Gyu, 1999. "Estimating the Discount Rate Policy Reaction Function of the Monetary Authority," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 379-401, July-Aug..
  8. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
  9. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May.
  10. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  11. Alex Cukierman, 1989. "Why does the Fed smooth interest rates?," Proceedings, Federal Reserve Bank of St. Louis, pages 111-157.
  12. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
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Cited by:
  1. Roman Horvath, 2008. "Asymmetric Monetary Policy in the Czech Republic?," Occasional Publications - Chapters in Edited Volumes, in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 9, pages 117-130 Czech National Bank, Research Department.
  2. Jaromir Baxa & Roman Horvath & Borek Vasicek, 2010. "How Does Monetary Policy Change? Evidence on Inflation Targeting Countries," Working Papers 2010/02, Czech National Bank, Research Department.
  3. Juraj Antal & Zuzana Antonicova & Michal Hlavacek & Tomas Holub & Roman Horvath & Jaromir Hurnik & Ondrej Kamenik & Karel Musil & Lubos Ruzicka & Jal Vlcek, 2009. "CNB Economic Research Bulletin: Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 7, number rb07/1 edited by Jan Babecky & Katerina Smidkova, August.

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