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Measuring monetary policy inertia in target Fed funds rate changes

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Author Info
Michael Dueker

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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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Publisher 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 listed on IDEAS
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.:

  1. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  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. [Downloadable!] (restricted)
    Other versions:
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
  4. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Chan G. Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Ling Hu & Peter C.B. Phillips, 2002. "Dynamics of the Federal Funds Target Rate: A Nonstationary Discrete Choice Approach," Cowles Foundation Discussion Papers 1365, Cowles Foundation, Yale University. [Downloadable!]
  2. George Monokroussos, 2006. "A Dynamic Tobit Model for the Open Market Desk's Daily Reaction Function," Computing in Economics and Finance 2006 390, Society for Computational Economics. [Downloadable!]
  3. George Monokroussos, 2005. "Dynamic Limited Dependent Variable Modeling and US Monetary Policy," Computing in Economics and Finance 2005 460, Society for Computational Economics. [Downloadable!]
  4. Ullrich, Katrin, 2006. "An impact of country-specific economic developments on ECB decisions," ZEW Discussion Papers 06-49, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  5. Deepankar Basu & Robert de Jong, 2007. "Dynamic Multinomial Ordered Choice with an Application to the Estimation of Monetary Policy Rules," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 11(4), pages 1507-1507. [Downloadable!] (restricted)
  6. Heinemann, Friedrich & Huefner, Felix P., 2002. "Is the View from the Eurotower Purely European? : National Divergence and ECB Interest Rate Policy," ZEW Discussion Papers 02-69, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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