Interest Rate Stepping, Interest Rate Smoothing and Uncertainty: Some Views from the Literature
AbstractThis report analyses some of the reasons mentioned in the literature as to why central banks change interest rates at discrete intervals in the face of a continuously changing environment (interest rate stepping) and why they seem to prefer to implement changes in a series of small steps (interest rate smoothing). Despite the fact that both seem difficult to explain within the certainty equivalent optimal control framework frequently used to study monetary policy, it appears that modifying some of the assumptions of these models go a long way in explaining these phenomena. In particular, replacing the assumption that all uncertainty takes the form of additive shocks with known probability distributions with perhaps more realistic ways to model uncertainty will often yield stepping and smoothing as features of an optimal interest rate rule.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 683.
Date of creation: 2002
Date of revision:
Interest rate smoothing; uncertainty;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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