Stop-Go Monetary Policy

38 Pages Posted: 1 Mar 2018

See all articles by Henry W. Chappell

Henry W. Chappell

University of South Carolina - Darla Moore School of Business

Mark N. Harris

Curtin University

Rob Roy McGregor

University of North Carolina (UNC) at Charlotte

Christopher Spencer

Loughborough University

Date Written: February 20, 2018

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 policymaking 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 rates are repeatedly moved, and

(3) there are other long stretches 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.

Keywords: monetary policy inertia, central banking, ordered probit, zero lower bound

JEL Classification: E52, E58, E65

Suggested Citation

Chappell, Henry W. and Harris, Mark N. and McGregor, Rob Roy and Spencer, Christopher, Stop-Go Monetary Policy (February 20, 2018). Available at SSRN: https://ssrn.com/abstract=3126731 or http://dx.doi.org/10.2139/ssrn.3126731

Henry W. Chappell (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

Francis M. Hipp Building
Department of Economics
Columbia, SC 29208
United States
803-777-4940 (Phone)
803-777-6876 (Fax)

Mark N. Harris

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

HOME PAGE: http://business.curtin.edu.au/contact/staff_directory/?profile=Mark-Harris

Rob Roy McGregor

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223-0001
United States
704-547-4121 (Phone)

Christopher Spencer

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

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