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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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  7. 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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  17. 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.
  18. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  19. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers 2003.6, Fondazione Eni Enrico Mattei.
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  24. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
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