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Measuring monetary policy inertia in target Fed funds rate changes

  • Michael Dueker

Recent research has grappled with an apparent paradox: Why would a central bank that is focused primarily on inflation control exhibit signs of inertia when making policy adjustments? In this article, Michael Dueker argues that fully characterizing the policy inertia is a precondition towards resolving the apparent paradox. This article presents empirical estimates of adjustments to the target fed funds rate that take into account two facets of policy inertia: a partial-adjustment mechanism and thresholds for making discrete changes to the target fed funds rate. With a more complete picture of the policy inertia, subsequent research can investigate whether policy appears to display either too much or the right amount of inertia.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Sep ()
Pages: 3-10

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Handle: RePEc:fip:fedlrv:y:1999:i:sep:p:3-10:n:v.81no.5
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  1. 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.
  2. Chan G. Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  3. 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.).
  4. 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.
  5. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
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