Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia

39 Pages Posted: 25 May 2004

See all articles by Glenn D. Rudebusch

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Date Written: August 2001

Abstract

Numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate. The conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks. However, such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than three months, which is contradicted by evidence from the term structure of interest rates. The illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face.

Keywords: Monetary policy, interest rates, Taylor rule

JEL Classification: E4, E5

Suggested Citation

Rudebusch, Glenn D., Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia (August 2001). Available at SSRN: https://ssrn.com/abstract=549502 or http://dx.doi.org/10.2139/ssrn.549502

Glenn D. Rudebusch (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
142
Abstract Views
838
rank
244,688
PlumX Metrics