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Stop-Go Monetary Policy
Chappell, Henry Harris, Mark N. McGregor, Rob Roy Spencer, Christopher
Chappell, Henry
Harris, Mark N.
McGregor, Rob Roy
Spencer, Christopher
Date
2018
Advisor
Type
Working Paper
Degree
Description
Abstract
We propose and estimate several discrete choice models of monetary policy decision-making that feature time-varying inertia. The models permit us to account for three stylized facts characterizing monetary policy making in the United States: (1) target interest rates are gradually adjusted in small discrete movements, (2) there are some long stretches of time in which rate are repeatedly moved, and (3) there are other long stretches of time in which the policy rate does not change. The proposed models perform well in predicting in-sample policy choices of the Federal Reserve and can explain the presence of policy inertia without including multiple lagged dependent variables in a monetary policy reaction function.