Overnight monetary policy in the United States: Active or interest-rate smoothing?
AbstractThis paper deals with active monetary policy and interest-rate smoothing regimes. In active monetary policy, changes in short-term interest rates are due to the exogenous actions of the central bank. Such a policy is successful only when economic agents in the money market are policy invariant in the sense that their behaviors are constant under interventions. Otherwise, an interest-rate-smoothing regime in which the central bank follows a "rule-based" policy is optimal. It was found that the coefficient of Fed funds rate in Treasury bill-Fed funds rates relationship is not policy invariant while the coefficient of the Treasury bill rate in Fed funds-Treasury bills rates relationship is policy invariant. Consequently, the optimal overnight monetary policy would be an interest-rate-smoothing process. It was found that such a policy has been followed in the United States.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 32 (2010)
Issue (Month): 1 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622617
Interest-rate smoothing Discretionary monetary policy and forward-looking agents;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
- Woodford, Michael, 2000.
"Optimal Monetary Policy Inertia,"
666, Stockholm University, Institute for International Economic Studies.
- Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
- Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
- Sarno, Lucio & Thornton, Daniel L., 2003.
"The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation,"
Journal of Banking & Finance,
Elsevier, vol. 27(6), pages 1079-1110, June.
- Lucio Sarno & Daniel L. Thornton, 2002. "The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation," Working Papers 2000-032, Federal Reserve Bank of St. Louis.
- Sarno, Lucio & Thornton, Daniel L, 2002. "The Dynamic Relationship Between the Federal Funds rate and the Treasury Bill Rate: An Empirical Investigation," CEPR Discussion Papers 3225, C.E.P.R. Discussion Papers.
- Marvin Goodfriend, 1990.
"Interest rates and the conduct of monetary policy,"
90-06, Federal Reserve Bank of Richmond.
- Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Carl Walsh, 2003.
"Speed Limit Policies: The Output Gap and Optimal Monetary Policy,"
American Economic Review,
American Economic Association, vol. 93(1), pages 265-278, March.
- Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
- Glenn D. Rudebusch, 2001.
"Is The Fed Too Timid? Monetary Policy In An Uncertain World,"
The Review of Economics and Statistics,
MIT Press, vol. 83(2), pages 203-217, May.
- Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
- Newey, Whitney K & West, Kenneth D, 1987.
"A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,"
Econometric Society, vol. 55(3), pages 703-08, May.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- Sack, Brian & Wieland, Volker, 2000.
"Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence,"
Journal of Economics and Business,
Elsevier, vol. 52(1-2), pages 205-228.
- Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
- Fair, Ray C, 1978.
"The Sensitivity of Fiscal Policy Effects to Assumptions about the Behavior of the Federal Reserve,"
Econometric Society, vol. 46(5), pages 1165-79, September.
- Ray C. Fair, 1977. "The Sensitivity of Fiscal-Policy Effects to Assumptions about the Behavior of the Federal Reserve," Cowles Foundation Discussion Papers 446, Cowles Foundation for Research in Economics, Yale University.
- Hansen, Bruce E., 1992.
"Testing for parameter instability in linear models,"
Journal of Policy Modeling,
Elsevier, vol. 14(4), pages 517-533, August.
- Tom Doan, . "STABTEST: RATS procedure to perform Hansen's stability test for OLS," Statistical Software Components RTS00199, Boston College Department of Economics.
- Amir Kia, 2006. "Economic policies and demand for money: evidence from Canada," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1389-1407.
- Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
- Engle, R. & Hendry, D., 1990.
"Testing Super Exogeneity And Invariance In Regression Models,"
Economics Series Working Papers
99100, University of Oxford, Department of Economics.
- Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
- Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
- 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.
- Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Amir Kia, 2003. "Forward-looking agents and macroeconomic determinants of the equity price in a small open economy," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 37-54.
- Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.