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Describing The Fed’S Conduct With Taylor Rules: Is Interest Rate Smoothing Important?

  • Efrem Castelnuovo

In this paper, the author employs models in level and first differences to gain some insights into the presence and significance of the degree of partial adjustment as opposed to a serially correlated policy shock in simple Taylor (1993) rules. In performing the exercise, the author considers potentially important, and usually omitted, regressors such as the quadratic output gap and the credit spread. While it cannot be excluded that serially correlated policy shocks may play a role in describing the federal funds rate path, the findings significantly support the importance of the lagged interest rate also in the 'enriched' Taylor-type models.

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Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): IV (2006)
Issue (Month): 3 (August)
Pages: 57-77

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Handle: RePEc:icf:icfjmo:v:04:y:2006:i:3:p:57-77
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  3. 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.
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  8. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers 2003.6, Fondazione Eni Enrico Mattei.
  9. Kim, Dong Heon & Denise R Osborn & Marianne Sensier, 2003. "Nonlinearity in the Fed's Monetary Policy Rule," Royal Economic Society Annual Conference 2003 121, Royal Economic Society.
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  17. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers.
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  19. Volker W. Wieland, 1999. "Monetary policy, parameter uncertainty and optimal learning," Finance and Economics Discussion Series 1999-48, Board of Governors of the Federal Reserve System (U.S.).
  20. Rafael Domenech & Mayte Ledo & David Taguas, 2000. "Some new results on interest rate rules in EMU and in the US," Working Papers 0002, BBVA Bank, Economic Research Department.
  21. 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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  24. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
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