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Why Do Central Banks Smooth Interest Rates?


  • Gabriel Srour


It is commonly observed that central banks respond gradually to economic shocks, moving the interest rate in small discrete steps in the same direction over an extended period of time. This paper examines the empirical evidence regarding central banks' smoothing of interest rates, paying particular attention to the case of Canada. It then reviews the alternative explanations of the stylized facts that have recently emerged in the literature.

Suggested Citation

  • Gabriel Srour, 2001. "Why Do Central Banks Smooth Interest Rates?," Staff Working Papers 01-17, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-17

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    References listed on IDEAS

    1. 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.
    2. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    3. Charles Goodhart, 1998. "Central Bankers and Uncertainty," FMG Special Papers sp106, Financial Markets Group.
    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. James Yetman, 2001. "Gaining Credibility for Inflation Targets," Computing in Economics and Finance 2001 34, Society for Computational Economics.
    6. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    7. Ronald J. Balvers & Thomas F. Cosimano, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 721-738.
    8. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    9. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    10. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal.
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    Cited by:

    1. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank.
    2. Jim Engle-Warnick & Nurlan Turdaliev, 2010. "An experimental test of Taylor-type rules with inexperienced central bankers," Experimental Economics, Springer;Economic Science Association, vol. 13(2), pages 146-166, June.
    3. Cars Hommes & Domenico Massaro & Matthias Weber, 2015. "Monetary Policy under Behavioral Expectations: Theory and Experiment," Tinbergen Institute Discussion Papers 15-087/II, Tinbergen Institute.
    4. Efrem Castelnuovo, 2002. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Macroeconomics 0211006, EconWPA.
    5. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
    6. Zbynek Stork, 2011. "A DSGE model of the Czech economy: a Ministry of Finance approach," EcoMod2011 3007, EcoMod.
    7. René Lalonde & Nicolas Parent, 2006. "The Federal Reserve's Dual Mandate: A Time-Varying Monetary Policy Priority Index for the United States," Staff Working Papers 06-11, Bank of Canada.
    8. Zbynek Stork, 2016. "Term Structure of Interest Rates: Macro-Finance Approach," EcoMod2016 9566, EcoMod.
    9. Efrem Castelnuovo, 2003. "Taylor Rules and Interest Rate Smoothing in the US and EMU," Macroeconomics 0303002, EconWPA.
    10. Efrem Castelnuovo, 2007. "Taylor Rules And Interest Rate Smoothing In The Euro Area," Manchester School, University of Manchester, vol. 75(1), pages 1-16, January.

    More about this item


    Monetary policy implementation;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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