This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Efrem Castelnuovo (Bocconi University and FEEM)

Additional information is available for the following registered author(s):

Abstract

Successful descriptions of the short-term nominal interest rate inertial behavior have frequently been obtained with small scale macro models in which a Central Banker minimizes a loss function containing an argument labelled as interest rate smoothing. The rationale for this argument is not straightforward; indeed, there has been a lively debate about it among academics. In this paper we perform a positive exercise to evaluate the relationship existing between private rational expectations and the interest rate smoothing argument. Our findings strongly support rational expectations as an element capable to remarkably reduce the importance of the interest rate smoothing weight in replicating the observed path of the federal funds rate. However, we find a predominance of adaptive expectations in shaping the future paths of inflation ad output gap. Our results also suggest that the Fed has followed a ’Strict Inflation Targeting’ strategy under Greenspan’s regime.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://129.3.20.41/eps/mac/papers/0211/0211006.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0211006.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 13 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0211006

Note: Type of Document - ; figures: included/request from author/draw your own
Contact details of provider:
Web page: http://129.3.20.41

For technical questions regarding this item, or to correct its listing, contact: (EconWPA).

Related research
Keywords: Central Banker interest rate smoothing rational expectations hybrid Phillips curve hybrid IS curve

Other versions of this item:

Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

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. Francisco Javier Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," IMF Working Papers 01/161, International Monetary Fund. [Downloadable!]
    Other versions:
  2. David Amirault & Brian O'Reilly, 2001. "The Zero Bound on Nominal Interest Rates: How Important Is It?," Working Papers 01-6, Bank of Canada. [Downloadable!]
  3. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April. [Downloadable!] (restricted)
    Other versions:
  4. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
    Other versions:
  5. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  6. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Lars E.O. Svensson & Michael Woodford, 2000. "Indicator Variables for Optimal Policy," NBER Working Papers 7953, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Papers in Applied Economic Theory 2002-02, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  9. repec:cup:macdyn:v:6:y:2002:i:1:p:85-110 is not listed on IDEAS
  10. William B. English & William R. Nelson & Brian P. Sack, 2002. "Interpreting the significance of lagged interest rate in estimated monetary policy rules," Finance and Economics Discussion Series 2002-24, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September. [Downloadable!] (restricted)
  12. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2000. "Optimal monetary policy," Working Paper 00-10, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  13. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September. [Downloadable!] (restricted)
  14. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  15. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
    Other versions:
  16. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    Other versions:
  17. Francisco J. Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," Banco de España Working Papers 0106, Banco de España. [Downloadable!]
  18. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Blackwell Publishing, vol. 2(1), pages 63-83, April. [Downloadable!] (restricted)
  19. Christopher Sims, 2001. "A Review of Monetary Policy Rules," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 562-566, June. [Downloadable!] (restricted)
  20. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129. [Downloadable!] (restricted)
    Other versions:
  21. 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:
  22. Bertocchi, Graziella & Spagat, Michael, 1991. "Learning, Experimentation and Monetary Policy," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 1991018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    Other versions:
  23. Richard Dennis & Ulf Soderstrom, 2002. "How important is precommitment for monetary policy?," Working Papers in Applied Economic Theory 2002-10, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  24. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04. [Downloadable!] (restricted)
    Other versions:
  25. Salemi, Michael K, 1995. "Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 419-33, October.
  26. 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)
    Other versions:
  27. 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)
  28. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
  29. Rudebusch, G. & Svensson, L.E.O., 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Papers 672, Stockholm - International Economic Studies.
    Other versions:
  30. 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)
  31. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September. [Downloadable!] (restricted)
    Other versions:
  32. John M. Roberts, 2001. "How well does the New Keynesian sticky-price model fit the data?," Finance and Economics Discussion Series 2001-13, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  33. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
    Other versions:
  34. Söderström, Ulf, 1999. "Should central banks be more aggressive?," Working Paper Series 84, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  35. 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!]
    Other versions:
  36. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May. [Downloadable!] (restricted)
    Other versions:
  37. Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
    Other versions:
  38. Richard Dennis, 2000. "Steps toward identifying central bank policy preferences," Working Papers in Applied Economic Theory 2000-13, Federal Reserve Bank of San Francisco. [Downloadable!]
  39. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series 1998-43, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  40. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34, pages 7-30. [Downloadable!] (restricted)
    Other versions:
  41. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
    Other versions:
  42. Volker Wieland, 1998. "Monetary policy and uncertainty about the natural unemployment rate," Finance and Economics Discussion Series 1998-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  43. 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)
  44. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  45. 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)
    Other versions:
  46. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
  47. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May. [Downloadable!] (restricted)
  48. Benjamin M. Friedman, 2000. "Monetary Policy," NBER Working Papers 8057, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  49. Gabriel Srour, 2001. "Why Do Central Banks Smooth Interest Rates?," Working Papers 01-17, Bank of Canada. [Downloadable!]
  50. Carlo A. Favero, . "Parameters´ Instability, Model Uncertainty and Optimal Monetary Policy," Working Papers 196, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  51. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December. [Downloadable!] (restricted)
    Other versions:
  52. 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!]
    Other versions:
  53. Jeffery D. Amato & Thomas Laubach, 1999. "The value of interest rate smoothing : how the private sector helps the Federal Reserve," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 47-64. [Downloadable!]
  54. 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)
    Other versions:
  55. 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.
  56. 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)
    Other versions:
  57. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June. [Downloadable!] (restricted)
    Other versions:
  58. Nessén, Marianne & Vestin, David, 2000. "Average Inflation Targeting," Working Paper Series 119, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  59. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
    Other versions:
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. Paolo Surico, 2004. "Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences," Computing in Economics and Finance 2004 108, Society for Computational Economics. [Downloadable!]
    Other versions:
  2. Efrem Castelnuovo, 2003. "Describing the Fed's conduct with Taylor rules: is interest rate smoothing important?," Working Paper Series 232, European Central Bank. [Downloadable!]
    Other versions:
  3. Söderström, Ulf & Söderlind, Paul & Vredin, Anders, 2002. "New-Keynesian Models and Monetary Policy: A Reexamination of the Stylized Facts," Working Paper Series in Economics and Finance 511, Stockholm School of Economics, revised 15 Aug 2003. [Downloadable!]
    Other versions:
  4. Söderström, Ulf & Söderlind, Paul & Vredin, Anders, 2002. "Can a Calibrated New-Keynesian Model of Monetary Policy Fit the Facts?," Working Paper Series 140, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
Statistics
Access and download statistics

Did you know? Want to help out with this project? Look for volunteer opportunities.

This page was last updated on 2008-8-11.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.