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Measuring monetary policy inertia in target Fed funds rate changes

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  • Michael J. Dueker

Abstract

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.

Suggested Citation

  • Michael J. Dueker, 1999. "Measuring monetary policy inertia in target Fed funds rate changes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-10.
  • Handle: RePEc:fip:fedlrv:y:1999:i:sep:p:3-10:n:v.81no.5
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    References listed on IDEAS

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    1. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    2. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    3. Chan G. Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    4. Brian P. 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.).
    5. 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.
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    Cited by:

    1. Isela Elizabeth Téllez León & Francisco Venegas Martínez, 2013. "Principales determinantes en las decisiones de política monetaria de México: un análisis econométrico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 28(1), pages 79-108.
    2. Ling Hu & Peter C.B. Phillips, 2002. "Dynamics of the Federal Funds Target Rate: A Nonstationary Discrete Choice Approach," Cowles Foundation Discussion Papers 1365, Cowles Foundation for Research in Economics, Yale University.
    3. Dong He & Laurent L. Pauwels, 2008. "What Prompts the People's Bank of China to Change Its Monetary Policy Stance? Evidence from a Discrete Choice Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 1-21.
    4. Friedrich Heinemann & Felix P. Huefner, 2004. "Is The View From The Eurotower Purely European? - National Divergence And Ecb Interest Rate Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(4), pages 544-558, September.
    5. Rebeca I. Muñoz Torres & David Shepherd, 2014. "Inflation Targeting and the Consistency of Monetary Policy Decisions in Mexico: an Empirical Analysis with Discrete Choice Models," Manchester School, University of Manchester, vol. 82, pages 21-46, December.
    6. George Monokroussos, 2013. "A Classical MCMC Approach to the Estimation of Limited Dependent Variable Models of Time Series," Computational Economics, Springer;Society for Computational Economics, vol. 42(1), pages 71-105, June.
    7. George Monokroussos, 2006. "A Dynamic Tobit Model for the Open Market Desk's Daily Reaction Function," Computing in Economics and Finance 2006 390, Society for Computational Economics.
    8. Zhang, Xinyu & Lu, Zudi & Zou, Guohua, 2013. "Adaptively combined forecasting for discrete response time series," Journal of Econometrics, Elsevier, vol. 176(1), pages 80-91.
    9. Pauwels, Laurent L. & Vasnev, Andrey L., 2016. "A note on the estimation of optimal weights for density forecast combinations," International Journal of Forecasting, Elsevier, vol. 32(2), pages 391-397.
    10. Eric Girardin & Sandrine Lunven & Guonan Ma, 2014. "Inflation and China's monetary policy reaction function: 2002-2013," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 159-170 Bank for International Settlements.
    11. Grammig, Joachim & Kehrle, Kerstin, 2008. "A new marked point process model for the federal funds rate target: Methodology and forecast evaluation," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2370-2396, July.
    12. Ullrich, Katrin, 2006. "An impact of country-specific economic developments on ECB decisions," ZEW Discussion Papers 06-049, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    13. George Monokroussos, 2011. "Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 519-534, March.
    14. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(4), pages 330-337, December.
    15. Dick van Dijk & Robin L. Lumsdaine & Michel van der Wel, 2014. "Market Set-Up in Advance of Federal Reserve Policy Decisions," NBER Working Papers 19814, National Bureau of Economic Research, Inc.
    16. Jef Boeckx, 2011. "Estimating monetary policy reaction functions : A discrete choice approach," Working Paper Research 210, National Bank of Belgium.

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