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Describing The Fed’S Conduct With Taylor Rules: Is Interest Rate Smoothing Important?

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Efrem Castelnuovo

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Abstract

In this paper, the author employs models in level and first differences to gain some insights into the presence and significance of the degree of partial adjustment as opposed to a serially correlated policy shock in simple Taylor (1993) rules. In performing the exercise, the author considers potentially important, and usually omitted, regressors such as the quadratic output gap and the credit spread. While it cannot be excluded that serially correlated policy shocks may play a role in describing the federal funds rate path, the findings significantly support the importance of the lagged interest rate also in the 'enriched' Taylor-type models.

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Publisher Info
Article provided by Icfai Press in its journal The ICFAI Journal of Monetary Economics.

Volume (Year): IV (2006)
Issue (Month): 3 (August)
Pages: 57-77
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Handle: RePEc:icf:icfjmo:v:04:y:2006:i:3:p:57-77

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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. 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!]
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  2. Alex Cukierman & Anton Muscatelli, . "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Department of Economics, University of Glasgow. [Downloadable!]
  3. Kim, Dong Heon & Denise R Osborn & Marianne Sensier, 2003. "Nonlinearity in the Fed's Monetary Policy Rule," Royal Economic Society Annual Conference 2003 121, Royal Economic Society. [Downloadable!]
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  4. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September. [Downloadable!] (restricted)
  5. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers 2003.6, Fondazione Eni Enrico Mattei. [Downloadable!]
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  7. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April. [Downloadable!] (restricted)
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  8. Carlo A. Favero, . "Parameters´ Instability, Model Uncertainty and Optimal Monetary Policy," Working Papers 196, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  9. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August. [Downloadable!] (restricted)
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  10. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, 09. [Downloadable!] (restricted)
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  11. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York. [Downloadable!]
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  12. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. 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. [Downloadable!] (restricted)
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  14. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 43-59, Winter.
  15. Paolo Surico, 2004. "Measuring the Time-Inconsistency of US Monetary Policy," Macroeconomics 0401006, EconWPA. [Downloadable!]
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  16. 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)
  17. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier. [Downloadable!] (restricted)
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  18. Domenech, Rafael & Ledo, Mayte & Taguas, David, 2002. "Some new results on interest rate rules in EMU and in the US," Journal of Economics and Business, Elsevier, vol. 54(4), pages 431-446. [Downloadable!] (restricted)
  19. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02. [Downloadable!] (restricted)
  20. Favero, Carlo A & Rovelli, Riccardo, 2003. " Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-56, August.
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  21. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May. [Downloadable!] (restricted)
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  22. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

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. Ansgar Belke & Thorsten Polleit, 2006. "How the ECB and the US Fed Set Interest Rates," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 269/2006, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
    Other versions:
  2. CARRILLO, Julio & FÈVE, Patrick & MATHERON, Julien, 2007. "Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis," IDEI Working Papers 431, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany. [Downloadable!]
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