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Why does the Monetary Policy Committee smooth interest rates?

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  • David Cobham

Abstract

Explanations of why the monetary authorities in different countries seem to smooth interest rates have focused on the official dislike of financial market volatility, aspects of the decision-making process, responses to uncertainty, inertial behaviour in a forward-looking environment, and serial correlation of shocks to the policymakers' expectations. This paper first shows that policy has been smoothest and comparable to that in other countries in the period of inflation targeting with Bank of England control of interest rates since 1997. It then uses the remarkably detailed evidence available from the minutes of the Monetary Policy Committee to evaluate the relevance of the various explanations of smoothing for the UK in this period. The paper concludes that the explanation of interest rate smoothing should be sought primarily in the serial correlation of shocks, together with some minor and short-term influences from uncertainty, while the other explanations turn out to be not relevant. Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 55 (2003)
Issue (Month): 3 (July)
Pages: 467-493

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Handle: RePEc:oup:oxecpp:v:55:y:2003:i:3:p:467-493

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Cited by:
  1. repec:ebl:ecbull:v:5:y:2004:i:17:p:1-6 is not listed on IDEAS
  2. Farvaque, Etienne & Matsueda, Norimichi & Méon, Pierre-Guillaume, 2009. "How monetary policy committees impact the volatility of policy rates," Journal of Macroeconomics, Elsevier, Elsevier, vol. 31(4), pages 534-546, December.
  3. Paul Downward & Andrew Mearman, 2005. "Methodological Triangulation at the Bank of England:An Investigation," Working Papers, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol 0505, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  4. Bhattacharjee, A. & Holly, S., 2005. "Inflation Targeting, Committee Decision Making and Uncertainty: The case of the Bank of England’s MPC," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0530, Faculty of Economics, University of Cambridge.
  5. C.J.M. Kool & S. Rosenkranz & M. Middeldorp, 2007. "Listening without understanding: Central Bank transparency, financial markets and the crowding out of private information," Working Papers, Utrecht School of Economics 07-19, Utrecht School of Economics.
  6. Arnab Bhattacharjee & Sean Holly, 2006. "Taking Personalities out of Monetary Policy Decision Making? Interactions, Heterogeneity and Committee Decisions in the Bank of England’s MPC," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200612, Centre for Dynamic Macroeconomic Analysis.
  7. Arnab Bhattacharjee & Sean Holly, 2005. "Inflation Targeting, Committee Decision Making and Uncertainty: The Case of the Bank of England’s MPC," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200503, Centre for Dynamic Macroeconomic Analysis.
  8. James Yetman, 2004. "Speed Limit Policies and Interest Rate Smoothing," Economics Bulletin, AccessEcon, vol. 5(17), pages 1-6.
  9. Etienne Farvaque & Norimichi Matsueda & Pierre-Guillaume Méon, 2007. "How committees reduce the volatility of policy rates," DULBEA Working Papers, ULB -- Universite Libre de Bruxelles 07-11.RS, ULB -- Universite Libre de Bruxelles.
  10. Peter Spahn, 2010. "Asset Prices, Inflation and Monetary Control - Re-inventing Money as a Policy Tool," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 323/2010, Department of Economics, University of Hohenheim, Germany.

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