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Why Do Central Banks Smooth Interest Rates?

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  • Gabriel Srour
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    Abstract

    It is commonly observed that central banks respond gradually to economic shocks, moving the interest rate in small discrete steps in the same direction over an extended period of time. This paper examines the empirical evidence regarding central banks' smoothing of interest rates, paying particular attention to the case of Canada. It then reviews the alternative explanations of the stylized facts that have recently emerged in the literature.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp01-17.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 01-17.

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    Length: 31 pages
    Date of creation: 2001
    Date of revision:
    Handle: RePEc:bca:bocawp:01-17

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    Keywords: Monetary policy implementation;

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    References

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    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.).
    2. Charles Goodhart, 1998. "Central Bankers and Uncertainty," FMG Special Papers sp106, Financial Markets Group.
    3. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
    4. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
    5. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal.
    6. 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.).
    7. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
    8. Balvers, Ronald J & Cosimano, Thomas F, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 721-38, October.
    9. James Yetman, 2001. "Gaining Credibility for Inflation Targets," Computing in Economics and Finance 2001 34, Society for Computational Economics.
    10. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    11. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
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    Cited by:
    1. Jim Engle-Warnick & Nurlan Turdaliev, 2010. "An experimental test of Taylor-type rules with inexperienced central bankers," Experimental Economics, Springer, vol. 13(2), pages 146-166, June.
    2. René Lalonde & Nicolas Parent, 2006. "The Federal Reserve's Dual Mandate: A Time-Varying Monetary Policy Priority Index for the United States," Working Papers 06-11, Bank of Canada.
    3. Efrem Castelnuovo, 2002. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Macroeconomics 0211006, EconWPA.
    4. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
    5. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA.
    6. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank, Research Centre.

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