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Measuring monetary policy inertia in target Fed funds rate changes

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  • Michael Dueker

Abstract

Recent research has grappled with an apparent paradox: Why would a central bank that is focused primarily on inflation control exhibit signs of inertia when making policy adjustments? In this article, Michael Dueker argues that fully characterizing the policy inertia is a precondition towards resolving the apparent paradox. This article presents empirical estimates of adjustments to the target fed funds rate that take into account two facets of policy inertia: a partial-adjustment mechanism and thresholds for making discrete changes to the target fed funds rate. With a more complete picture of the policy inertia, subsequent research can investigate whether policy appears to display either too much or the right amount of inertia.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Sep ()
Pages: 3-10

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Handle: RePEc:fip:fedlrv:y:1999:i:sep:p:3-10:n:v.81no.5

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Keywords: Monetary policy ; Federal funds rate ; Federal Open Market Committee;

References

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  1. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 245-274, April.
  2. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-17, Board of Governors of the Federal Reserve System (U.S.).
  3. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 605-631, April.
  4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  5. Chan G. Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 3-16.
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Cited by:
  1. Sjoerd van den Hauwe & Dick van Dijk & Richard Paap, 2011. "Bayesian Forecasting of Federal Funds Target Rate Decisions," Tinbergen Institute Discussion Papers 11-093/4, Tinbergen Institute.
  2. George Monokroussos, 2006. "Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy," Discussion Papers, University at Albany, SUNY, Department of Economics 06-02, University at Albany, SUNY, Department of Economics.
  3. Huefner, Felix P & Friedrich Heinemann, 2003. "Is the View from the Eurotower Purely European? - National Divergence and ECB Interest Rate Policy," Royal Economic Society Annual Conference 2003, Royal Economic Society 110, Royal Economic Society.
  4. Grammig, Joachim & Kehrle, Kerstin, 2008. "A new marked point process model for the federal funds rate target: Methodology and forecast evaluation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(7), pages 2370-2396, July.
  5. Ling Hu & Peter C.B. Phillips, 2002. "Dynamics of the Federal Funds Target Rate: A Nonstationary Discrete Choice Approach," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1365, Cowles Foundation for Research in Economics, Yale University.
  6. Isela Elizabeth Téllez León & Francisco Venegas Martínez, 2013. "Principales determinantes en las decisiones de política monetaria de México: un análisis econométrico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 28(1), pages 79-108.
  7. Ullrich, Katrin, 2006. "An impact of country-specific economic developments on ECB decisions," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-49, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Dong He & Laurent L. Pauwels, 2008. "What Prompts the People's Bank of China to Change Its Monetary Policy Stance? Evidence from a Discrete Choice Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 1-21.
  9. Zhang, Xinyu & Lu, Zudi & Zou, Guohua, 2013. "Adaptively combined forecasting for discrete response time series," Journal of Econometrics, Elsevier, Elsevier, vol. 176(1), pages 80-91.
  10. George Monokroussos, 2013. "A Classical MCMC Approach to the Estimation of Limited Dependent Variable Models of Time Series," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 42(1), pages 71-105, June.
  11. George Monokroussos, 2006. "A Dynamic Tobit Model for the Open Market Desk's Daily Reaction Function," Computing in Economics and Finance 2006, Society for Computational Economics 390, Society for Computational Economics.
  12. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 31(4), pages 330-337, December.

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