| Publisher | Federal Reserve Board | ||
|---|---|---|---|
| Format | 2.6MB PDF, requires Acrobat Rdr 5 | Date added | 01 Aug 1999 |
| Topics | Bank Management, Economic Modeling | ||
| Downloads | 7 | ||
The conduct of monetary policy by central banks is of considerable interest to both academic researchers and to financial market participants. This interest has generated a large literature that attempts to describe and evaluate the interest rate policies of central banks. One characteristic that has been widely noted in this literature is that many central banks, including the Federal Reserve, adjust short-term interest rates in a smooth manner. In fact, some researchers have argued that observed interest rate movements are too sluggish and that a less timid interest rate policy would be more effective at stabilizing output and inflation. In particular, the paper considers three characteristics of the policy making environment that may render some degree of interest-rate smoothing optimal: forward-looking behavior by market participants, measurement error associated with key macroeconomic variables and uncertainty regarding relevant structural parameters.
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