The Optimal Design of Interest Rate Target Changes
39 Pages Posted: 15 Oct 2002
Date Written: April 2002
This paper derives the optimal size and timing of interest rate target changes. Despite the simplicity of the optimal rule, we are able to replicate a number of puzzling features of interest rate targeting observe in practice, as well as explain some dynamic properties of market interest rates. Extensions to deal with monetary policy cycles, anticipated and unanticipated target changes, and the effect of FOMC meeting dates are discussed.
Keywords: Central Banks, Federal Funds Rate, Fed, Interest Rate Smoothing
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation