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

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Author Info
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 University 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. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Department of Economics, University of Glasgow, revised Mar 2002. [Downloadable!]
  2. 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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  3. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August. [Downloadable!] (restricted)
    Other versions:
  4. 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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  5. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond. [Downloadable!]
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  6. 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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  7. 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)
  8. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33. [Downloadable!]
  9. 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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  10. 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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  11. 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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  12. 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.
  13. 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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  14. 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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  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(1), pages 195-214, December. [Downloadable!] (restricted)
  17. 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)
  18. 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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  19. 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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  20. 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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  21. Carlo A. Favero, . "Parameters´ Instability, Model Uncertainty and Optimal Monetary Policy," Working Papers 196, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  22. 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)
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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. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor and Francis Journals, vol. 39(17), pages 2197-2209. [Downloadable!] (restricted)
    Other versions:
  2. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany. [Downloadable!]
  3. Ansgar Belke & Wim Kösters & Martin Leschke & Thorsten Polleit, 2005. "Back to the rules," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 268/2005, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  4. Carrillo, J. & Fève, P. & Matheron, J., 2006. "Monetary Policy Inertia or Persistent Shocks?," Documents de Travail 150, Banque de France. [Downloadable!]
  5. 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:
  6. Mésonnier, J-S. & Renne, J-P., 2004. "Règle de Taylor et politique monétaire dans la zone euro," Documents de Travail 117, Banque de France. [Downloadable!]
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