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Interest Rate Smoothing and "Calvo-Type" Interest Rate Rules: A Comment on Levine, McAdam, and Pearlman (2007)

Author

Listed:
  • Ida Wolden Bache

    (Norges Bank (Central Bank of Norway))

  • Øistein Røislanda

    (Norges Bank (Central Bank of Norway))

  • Kjersti Næss Torstensen

    (Norges Bank (Central Bank of Norway) and European University Institute)

Abstract

In a recent paper, Levine, McAdam, and Pearlman (2007) propose a new type of interest rate rule, which they denote a “Calvo-type” rule. The Calvo-type interest rate responds to the discounted sum of current and future rates of inflation. We show that a Calvo-type rule can be derived from a very different assumption than the one used by Levine, McAdam, and Pearlman (2007), namely a preference for interest rate smoothing. In addition to giving an alternative rationale for the Calvo-type rule, we provide additional empirical support for the specification.

Suggested Citation

  • Ida Wolden Bache & Øistein Røislanda & Kjersti Næss Torstensen, 2011. "Interest Rate Smoothing and "Calvo-Type" Interest Rate Rules: A Comment on Levine, McAdam, and Pearlman (2007)," International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 79-90, September.
    • Handle: RePEc:ijc:ijcjou:y:2011:q:3:a:3
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    References listed on IDEAS

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    1. Paul Levine & Peter McAdam & Joseph Pearlman, 2007. "Inflation-Forecast-Based Rules and Indeterminacy: A Puzzle and a Resolution," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 77-110, December.
    2. Gabriel, Vasco J. & Levine, Paul & Spencer, Christopher, 2009. "How forward-looking is the Fed? Direct estimates from a 'Calvo-type' rule," Economics Letters, Elsevier, vol. 104(2), pages 92-95, August.
    3. Sophocles N. Brissimis & Nicholas S. Magginas, 2008. "Inflation Forecasts and the New Keynesian Phillips Curve," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 1-22, June.
    4. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    6. 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.
    7. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
    8. Hall, Alastair R. & Inoue, Atsushi, 2003. "The large sample behaviour of the generalized method of moments estimator in misspecified models," Journal of Econometrics, Elsevier, vol. 114(2), pages 361-394, June.
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    Cited by:

    1. Eurilton Araújo & Débora Gouveia, 2013. "Calvo-type rules and the forward-looking behavior of inflation targeting central banks," Economics Bulletin, AccessEcon, vol. 33(3), pages 2042-2051.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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